May 14, 2013

China: Metals & Mining: Base Metals

Equity Research Weak supply growth to improve zinc/lead outlook; resume on 2 cos

Supply-demand for zinc/lead to be balanced over medium/long term RATINGS/TP SUMMARY We expect supply growth from zinc and lead mines to slow down over the medium-to-long term. We note that several zinc and lead miners have Company Ticker Rating 12M TP Price Current POT UP/DOWN Jiangxi Copper (A) 600362.SS Buy 23.32 21.2 10.3% announced either closure of mines or cutting production during 2013-2015 Zhongjin Gold 600489.SS Neutral 13.86 12.4 12.2% Zhongjin Lingnan 000060.SZ Neutral 8.60 9.0 -4.1% due to resource depletion. Furthermore, supply from potential projects Zijin (A) 601899.SS Neutral 3.09 3.1 -0.9% Shandong Gold 600547.SS Neutral 30.96 32.1 -3.6% coming onstream and small mines in China will be limited before 2015. Our Tongling 000630.SZ Neutral 14.30 15.4 -7.0% Chihong 600497.SS Neutral 10.41 11.9 -12.5% GS commodities research team estimates that global zinc mine production Chalco (A) 601600.SS Sell 3.30 4.1 -19.3% Yunnan Copper 000878.SZ Sell 6.85 12.6 -45.5% CAGR will slow to 2.4% over 2013E-2015E, and demand will increase to 4.3% on the back of urbanization in China and consumption upgrades, thereby Note: (1) Target prices are in Rmb. (2) Share prices as of May 10, 2013. (3) 12-m TPs are based on EV/GCI vs. restoring the supply-demand balance for zinc. CROCI/WACC (Director’s Cut).

Source: Datastream, Gao Hua Securities Research We expect zinc/lead prices to rise in 2014-2015 as fundamentals improve. estimates.

Our GS commodities research team’s 2013E/2014E/2015E price forecasts per KEY 2013E ZINC AND LEAD A-SHARE ESTIMATES ton for zinc are US$2,013 / US$2,175/US$2,200 and lead are US$2,163/US$2,338/US$2,365. Net profit Production PE PB ROE growth growth Industry consolidation and environmental protection should help alleviate excess capacity in China’s zinc and lead industry, in our view. We Lingnan 23% 16% 34.9 3.1 9.1% note tougher environmental norms and emissions targets are likely to Chihong -8% 8% 48.9 4.0 8.2% reduce zinc and lead refining capacity by 2 mn tons (government’s plan of Source: Gao Hua Securities Research estimates. 1.3mt lead and 0.65mt zinc) during the 12th Five-Year Plan, which we RELATED RESEARCH believe will help support zinc and lead prices in China. Metal Detector: Zinc finding its floor, April 23, 2013

Resume coverage on Lingnan and Chihong, both with Neutral Global Commodities Research: GS Mining Commodity Lingnan: We believe overseas expansion (Perilya/GlobeStar) and subsequent Forecasts for 2013, and Beyond, January 16, 2013 improvement in mining operations indicate strong execution skills. Further, Global Commodities Research: The Old Economy Renaissance: 2013-2014 Issues and Outlook, December 5, 2012 the company is now back to normal operations, post the environmental accidents over 2010-2012. We resume coverage with Neutral as its valuation is not attractive, and our 12-month Director’s Cut-based TP of Rmb8.6.

Chihong: Resource allocation is complete and earnings growth is now awaited. Rapid resource expansion generated a large increase in capex over the past 3 years, and we see its CROCI improving at a slow pace (2013/2014 CROCI of 9.3%/9.1% down from 10.5% in 2012). We resume coverage with Neutral and our 12-m Director’s Cut-based TP of Rmb10.41.

Key risks Downside: Environmental accidents impacting operations; weak zinc/ lead prices; Upside: Potential government stimulus package boosting demand.

Jefferson Zhang +86(21)2401-8945 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with Yong Han, CFA companies covered in its research reports. As a result, +86(21)2401-8948 [email protected] Beijing Gao Hua Securities Company Limited 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research May 14, 2013 China: Metals & Mining: Base Metals

Table of Contents

Slowdown in supply growth for zinc and lead, resume on 2 stocks 3 Zinc and lead supply-demand to be balanced over the next 3 years 4 China zinc/lead industry: Consolidation likely to cut excess capacity 8 Operations comparison for A-share zinc and lead firms 13 Using Director’s Cut to value zinc and lead firms 15 Chihong (600497.SS, Neutral): Resources acquired, awaiting profits 18 Zhongjin Lingnan (000060.SZ, Neutral): Back to normal operations 24 Disclosure Appendix 31

The prices in this report are as of the market close of May 10, 2013.

Exhibit 1: Valuation table for selected global non-ferrous metal companies under GS/GH coverage

GS/GH 10-May-13 EPS PE (X) P/B (X) EV/EBITDA (X) ROE

Ticker Rating Price Ccy 12M TP 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E China-A share Jiangxi Copper (A) 600362.SS Buy 21.15 CNY 23.32 1.46 1.36 14.5 15.6 1.6 1.5 9.4 9.6 11% 10%

Zhongjin Gold 600489.SS Neutral 12.35 CNY 13.86 0.55 0.46 22.4 27.0 3.1 2.8 9.4 10.4 15% 11%

Zhongjin Lingnan 000060.SZ Neutral 8.97 CNY 8.60 0.26 0.28 34.9 31.6 3.1 2.8 11.7 10.9 9% 9%

Zijin Mining (A) 601899.SS Neutral 3.12 CNY 3.09 0.24 0.19 13.3 16.1 2.2 2.0 7.5 8.4 17% 13%

Shandong Gold 600547.SS Neutral 32.13 CNY 30.96 1.36 1.18 23.6 27.3 4.9 4.2 12.2 13.2 23% 17%

Tongling Non-ferrous 000630.SZ Neutral 15.38 CNY 14.30 0.77 0.82 20.0 18.8 1.9 1.7 12.7 11.4 10% 10%

Chihong Zinc & Germanium 600497.SS Neutral 11.89 CNY 10.41 0.24 0.32 48.9 37.7 4.0 3.7 14.9 13.5 8% 10%

Chalco (A) 601600.SS Sell 4.09 CNY 3.30 (0.16) (0.12) 1.3 1.3 17.8 20.6 -5% -4%

Yunnan Copper 000878.SZ Sell 12.58 CNY 6.85 0.04 0.04 2.6 2.5 17.5 18.1 1% 1%

Median-A share metals companies 22.4 27.0 2.6 2.4 12.0 11.2 11% 10%

HK-H share Jiangxi Copper (H) 0358.HK Buy 16.42 HKD 18.30 1.46 1.36 8.9 9.6 1.0 0.9 5.8 5.9 11% 10%

Zijin Mining (H) 2899.HK Buy 2.33 HKD 2.70 0.24 0.19 7.8 9.5 1.3 1.2 5.0 5.6 17% 13%

China Molybdenum 3993.HK Neutral 3.17 HKD 3.91 0.23 0.22 10.7 11.5 1.0 0.9 5.8 5.2 9% 8%

Zhaojin Mining (H) 1818.HK Sell 8.50 HKD 7.00 0.57 0.45 11.7 14.9 2.1 1.9 8.2 9.5 19% 13%

Chalco (H) 2600.HK Sell 3.24 HKD 2.40 (0.16) (0.12) 0.8 0.8 15.3 17.7 -5% -4%

Median-H share metals companies 9.8 10.6 1.0 0.9 5.8 5.9 11% 10%

US Vale VALE Buy 16.96 USD 25.60 2.09 2.32 8.1 7.3 1.2 1.1 4.6 4.4 15% 15%

Freeport-McMoRan Copper & GoFCX Buy 32.55 USD 38.00 3.35 3.00 9.7 10.8 1.5 1.4 4.4 4.7 17% 13%

Alcoa AA Neutral 8.70 USD 8.00 0.42 0.65 20.8 13.4 0.7 0.6 7.1 6.3 4% 5%

Southern Copper Corp. SCCO Neutral 33.31 USD 42.00 2.61 2.22 12.7 15.0 4.6 3.9 8.0 8.6 41% 28%

Median-US metals companies 11.2 12.1 1.4 1.2 5.9 5.5 16% 14%

Australia OceanaGold OGC.AX Buy* 2.07 AUD 2.60 0.16 0.21 13.0 9.8 0.9 0.8 3.9 3.4 7% 9%

Lynas LYC.AX Buy 0.66 AUD 0.81 (0.06) 0.04 15.0 1.9 1.8 9.5 -20% 12%

Teranga Gold TGZ.AX Sell 0.93 AUD 0.50 0.10 (0.03) 9.4 0.6 0.6 3.7 7.6 6% -2%

Alumina AWC.AX Sell 1.09 AUD 0.90 (0.01) 0.00 0.9 0.9 15.4 13.6 -1% 0%

Alacer Gold AQG.AX Sell 2.93 AUD 2.33 0.15 0.10 20.0 30.2 0.8 0.8 2.8 3.2 4% 3%

Iluka Resources ILU.AX Neutral 10.80 AUD 8.85 0.34 1.23 32.1 8.8 2.7 2.4 11.7 4.4 5% 29%

Median-Australian metals companies 20.0 15.0 0.9 0.9 7.7 7.6 4% 3%

*This stock is on our regional Conviction List Note: US stocks are assigned 6-month target prices

Source: DataStream, Goldman Sachs research estimates, Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 2 May 14, 2013 China: Metals & Mining: Base Metals

Slowdown in supply growth for zinc and lead, resume on 2 stocks

Supply growth from zinc and lead mines likely to slow over the medium-to-long term. The Dairi (Indonesia) and Mount Isa (Australia) zinc and lead mines under construction are scheduled to come onstream during 2013-2015. However, key mines such as Century and Brunswick are likely to close down or cut production due to resource depletion. We believe this would severely limit potential capacity release at zinc and lead facilities before 2015. Our GS commodities research team estimates that during 2013E-2015E, global zinc mine production will see a CAGR slowdown to 2.4%, a notch below 4% CAGR over the past decade. In terms of demand, we expect Chinese urbanization and consumption upgrades to drive continued growth in the real estate and automobile industries over the medium term. At the same time, the US real estate and car markets are experiencing a revival. Our GS commodity research team believes global demand for refined zinc will increase 4.3% CAGR over 2013E- 2015E, outpacing supply growth and restoring the supply-demand balance. Industry consolidation and stricter environmental norms should help alleviate excess capacity in China’s zinc and lead industry. Small mines currently account for 90% or more of China’s zinc and lead industry. The Chinese government has strengthened its push for M&A among metal mines in recent years to further increase industry consolidation. Restrictions on refining capacity have also intensified, including tougher environmental norms and emissions targets that will reduce lead refining capacity (including recycled lead) by 1.3 mn tons and zinc refining capacity by 650k tons (government’s plan) during the 12th Five-Year Plan (2011-2015). We believe excess capacity in China’s zinc and lead industry will be alleviated somewhat, reducing headwinds on zinc and lead prices. We expect zinc and lead prices to rise in 2014E-2015E. Even though we believe high zinc and lead inventories will depress prices in the short term, as peak consumption season destocking concludes, supply and demand will become balanced, and zinc and lead prices will rise further in 2014E-2015E. Our GS commodity research team’s 2013E/2014E/2015E price forecasts per ton for zinc are US$2,013 / US$2,175/US$2,200 and lead are US$2,163/US$2,338/ US$2,365. In this report, we resume coverage on two A-share zinc and lead companies. Chihong’s net profit has higher sensitivity to zinc and lead prices, and we believe greater organic growth over the next three years will result in the company benefitting further from rising zinc and lead prices. Zhongjin Lingnan has a stable asset and liability structure, and more effective overseas assets. Zhongjin Lingnan: Overseas expansion and mining operations reflect the firm’s strong execution skills. Lingnan successfully acquired Perliya and GlobeStar overseas in 2009 and 2010 and subsequently their earnings improved significantly, reflecting Lingnan’s strong execution skills, in our view. Over the past two years, however, it has been affected by environmental incidents, such as the Shaoguan and Renhua accidents, from which it has recently recovered to normal production. We resume coverage of Zhongjin Lingnan with a Neutral rating and a 12-month Director’s Cut–based target price of Rmb8.6. Chihong: Resource layout complete, awaiting earnings updates. Resource allocation is complete and earnings growth is awaited. Rapid resource expansion generated a large increase in capex over past 3 years, and we see its CROCI improving at a slow pace (2013/2014 CROCI of 9.3%/9.1% down from 10.5% in 2012). Our 12-month Director’s Cut– based target price is Rmb10.41, and resume coverage with a Neutral rating. Exhibit 2: Comparison of our earnings estimates and market consensus for A share zinc and lead coverage universe GH estimated earningConsensus GH estimated EPS Consensus Diff. from Cons. Potential Upside/ Downside

Companies 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E Current TP Potent ial M n Rmb M n Rmb Rmb Rmb % Rmb Rmb up/ downside Chihong 318 413 365 414 0.24 0.32 0.28 0.32 -13% 0% 11.9 10.41 -12.5% Lingnan 530 586 536 681 0.26 0.28 0.26 0.33 -1% -14% 9.0 8.60 -4.1%

Source: Wind, Gao Hua Securities Research estimates

Goldman Sachs Global Investment Research 3 May 14, 2013 China: Metals & Mining: Base Metals

Zinc and lead supply-demand to be balanced over the next 3 years

Supply: Resource exhaustion and industry consolidation will slow zinc and lead supply growth over the medium-to-long term We divide sources of global zinc and lead supply into three types: mines in production or under construction, potential zinc and lead projects, and growth from China. Based on this analytic framework, we estimate 2013-2015 zinc and lead supply growth of 1.1%/2.6%/3.6%, with a 2.4% CAGR, slower than the 4% rate over the past 10 years. Zinc and lead mines under construction coming onstream unable to replace lost capacity from closing mines. We estimate that mine closings and lost capacity from resource exhaustion in 2013/2014/2015 will lower zinc concentrate supply by approximately 361k/494k/397k t. The major source of decline in 2013 will be Xstrata as the firm will close its Brunswick and Perseverance mines due to declining ore quality and resource exhaustion, and lower production at its Antamina mine, lowering global zinc production by 361k t. The estimated loss in 2014 is from reduced production at Minmetals’ Century zinc and lead mine, and the closing of Vedanta’s Lisheen mine, decreasing zinc mine production by 494k t. In addition, while zinc and lead mines under construction—like Dairi and Mount Isa—will come onstream over 2013-2015, we estimate that they will only increase zinc mine production in those years by 510k/236k/132k t, not enough to offset the declines caused by mine closings.

Exhibit 3: Zinc mines in production which will close/decrease production in 2013-2015, and their effects on zinc concentrate supply Units: 1,000 t CapacityCapacity changes in 2013-2015 Capacity Change Company Zinc mines 2012E 2013E 2014E 2015E 2015E 2015E-2012E Minmetals Century 510 0 -221 -289 0 -510 Xstrata Brunswick 203 -183 -20 0 0 -203 Vedanta Lisheen 168 0 -168 0 0 -168 Xstrata Perseverance 136 -106 -30 0 0 -136 Agnico Eagle La Ronde 50 -35 -9 0 6 -44 Kazzinc Zyryanovsk 113 12 -16 -63 46 -67 Minmetals Golden Grove 68 -13 -30 3 28 -40 Kagara Mt Garnet 44 4 0 -48 0 -44 Teck Red Dog 540 -10 0 0 530 -10 Xstrata Antamina 250 -30 0 0 220 -30 Total 2,082 -361 -494 -397 830 -1,252 Source: Wood Mackenzie, Goldman Sachs Global ECS Research estimates

Exhibit 4: Key zinc mines under construction set to come online/expand production, 2013- 2015 Units: 1,000 t

CapacityCapacity changes in 2013-2015 Capacity Change Company Zinc mines 2012E 2013E 2014E 2015E 2015E 2015E-2012E Xstrata Mount Isa Pb/Zn 375 25 75 35 510 135 Herald Diari 0 110 12 0 122 122 Various China 4,179 88 35 -49 4,252 73 Glencore Perkoa 35 45 10 0 90 55 Zijin Kyzyl Tashtygskoe 50 30 10 0 90 40 Penoles Velardena 0 40 35 10 85 85 Xstrata Bracemac McLeod 0 60 22 0 82 82 HudBay Lalor Lake 8 12 20 40 80 72 Compania Cerro Lindo 115 35 0 0 150 35 Xstrata McArthur River 200 15 4 4 223 23 Minmetals Bisha 0 30 60 90 90 Hindustan Rampura-Agucha 750 30 -30 10 760 10 TajikistanAltintopkan102013226555 Total 5,722 510 236 132 6,599 877

Source: Wood Mackenzie, Goldman Sachs Global ECS Research estimates

Goldman Sachs Global Investment Research 4 May 14, 2013 China: Metals & Mining: Base Metals

Potential zinc mine capacity release will be relatively slow. We believe another key factor in determining zinc concentrate supply growth is potential capacity release of zinc and lead mines. Potential zinc and lead mines have verified resources, but have not yet begun construction. These projects can be divided based on the amount of progress made, i.e., projects which are still at the feasibility study stage, projects which have been closed but may resume production, projects in the financing stage, and projects which have received construction approval. Our GS commodities research team estimates global potential zinc mine production of 1.9mt by 2015E. However, based on the current progress in potential mines, we believe they will come on line relatively slowly.

Exhibit 5: Contribution to ‘probable’ supply, 2011-2015, Exhibit 6: Key potential zinc and lead mines, and by project type/stage estimated progress Tonnage is in Kt Units: 1,000 t

No. Probable Total %probable Estimate year to Type/ Stage Zinc mines Country Capacity Mines tonnage growth come online Feasibility 18 1285 68% Dugald River Australia 200 2015 Potential Restart 12 337 18% Selwyn Canada 100 2015/16 Financing/ Refin. 6 207 11% Ozernoye Russia 350 2015/16 Gamsberg South Africa 200 2015/16 Permitting 2503% Oued-Amizour (Tala Hamza) Algeria 164 2017/18 Total 39 1878 100% Mehdiabad Iran 400 2018/19 Total 1414

Source: Wood Mackenzie, Goldman Sachs Global ECS Research estimates Source: ILZSG, Gao Hua Securities Research.

Integration of China’s zinc and lead industry could ease production growth concerns. The integration of China’s zinc and lead industry mainly involves consolidation of small- scale mines and limiting zinc and lead smelting. We estimate that the Chinese government will continue to attempt to rectify the zinc and lead industry’s “small-scale and fragmented” nature and increase industry consolidation. Furthermore, we note that environmental requirements will limit zinc and lead smelter capacity—energy-saving and emissions targets will lead to decrease in lead smelting capacity of 1.3 mt by the end of 2015E (including recycled lead capacity), and a decrease in zinc smelting capacity of 650k t; recycled lead production will increase to 40% (all these targets are set by the government) of total production. Our base case assumes refined zinc production growth of 6% in 2013E and 7% in 2014E.

In addition, we believe global refined lead supply growth will slow. With zinc and lead being generally found in the same mines, most zinc mine closures will equally affect lead concentrate production, and we estimate that refined lead production growth will slow in 2013-2015. Our GS commodities research team estimates refined lead production growth at 7% for 2013E, slightly below the average 8.3% growth in 2010-2012.

Demand: Global industrial recovery will spur zinc and lead demand growth The Goldman Sachs ECS Research team estimates that global GDP will increase to 3.2% in 2013E, from 3.0% in 2012. They estimate 2013E GDP growth in emerging markets (e.g., China, India, Brazil, Russia) at 5.8%, up from 2012’s 5.4% (Exhibit 7). The momentum of the Goldman Sachs Global Leading Indicator has turned positive since August 2012, and remained so for the past several months, indicating that global manufacturing activity will continue to recover.

Goldman Sachs Global Investment Research 5 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 7: Our ECS Research team estimates global GDP Exhibit 8: …and the Goldman Sachs GLI indicates recovery in 2013/2014… recovery in global manufacturing

2014 US PMI China PMI Real GDP, % change 2013 2014 70 2.0 Q1 Q2 Q3 Q4 Europe PMI GS GLI Momentum (Rhs) 65 1.5 USA 2.1 2.9 2.4 2.7 3.1 3.4 Japan 1.4 1.7 3.9 1.7 0.8 0.2 60 1.0 Euro area -0.70.80.30.70.91.1 55 0.5 France -0.7 0.4 -0.2 0.3 0.6 0.8 50 0.0 Germany 0.4 1.8 1.4 1.8 2 2.1 Italy -1.5 0.4 -0.1 0.3 0.6 0.9 45 (0.5) UK 1.32 22.122.1 40 (1.0) China 7.8 8.4 8.3 8.4 8.4 8.5 35 (1.5) India 5.8 7.2 7.1 7.1 7.3 7.4 30 (2.0) Brazil 3.3 4.4 4.6 4.6 4.3 4 Russia 3.1 4.3 3.4 4.7 4.5 4.5 25 (2.5) Advanced Economies 1.2 2.2 2.1 2.1 2.2 2.2 10/08 04/09 10/09 04/10 10/10 04/11 10/11 04/12 10/12 04/13 Emerging Markets 5.8 6.5 6.5 6.6 6.5 6.6 World 3.2 4.1 4 4.1 4.1 4.2

Source: Goldman Sachs Global ECS Research estimates. Source: Bloomberg, Goldman Sachs Global ECS Research estimates.

Zinc: Urbanization in China and upgraded consumption are key drivers of demand

Zinc has good anti-corrosion, thermal conductivity and electrical conductivity properties. Its main uses in primary consumption are in galvanization and zinc alloys, applications which account for over 50% of total zinc use. Key downstream industries include property, home appliances and automotives. On a country level, zinc consumption in China currently accounts for over 40% of the world total (Exhibit 10), making it one of the world’s major zinc consumers. Our China real estate team expects total GFA sold to rise 20% yoy in 2013E, which we believe will drive recovery in industries like home appliances, spurring higher zinc demand. Urbanization and upgraded consumption are also likely to increase automotive consumption. Furthermore, moderate recovery in demand in regions outside of China (the property and automotive industries in the US, other developing economies) will support global zinc consumption in 2013 and 2014, in our view (Exhibits 11 and 12). Our GS commodities research team estimates global zinc consumption growth of 3.9% in 2013E and 4.4% in 2014E.

Exhibit 9: Structure of global primary zinc consumption Exhibit 10: Global zinc consumption by country Galvanization and zinc alloys make up over 50% of zinc China consumes over 40% of the world’s zinc, as of 2011 consumption, as of 2011

4% 6% 6% Zincification China 26.5% Zinc alloy USA 40.6% Brass Western Europe 17% 50% Zinc products India 4.0% Chemical Japan Others 4.8% Others 17% 16.1% 8.1%

Source: ILZSG, Gao Hua Securities Research Source: ILZSG, Gao Hua Securities Research

Goldman Sachs Global Investment Research 6 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 11: US property consumption has improved Exhibit 12: US automotive consumption growth significantly since 2012 continues Units: 1,000 units; % Units: mn cars; %

60 50.0% 10.0 30% US new house sales (Lhs) yoy US auto sales (Lhs) yoy 40.0% 9.0 20% 50 30.0% 8.0 10% 20.0% 40 7.0 10.0% 6.0 0% 30 0.0% 5.0 ‐10% ‐10.0% 4.0 ‐20% 20 ‐20.0% 3.0 ‐30% ‐30.0% 10 2.0 ‐40.0% 1.0 ‐40% 0 ‐50.0% 0.0 ‐50% 03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13 03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13

Source: Wind, Gao Hua Securities Research. Source: Wind, Gao Hua Securities Research.

Lead: Lead-acid batteries to remain the most stable form of energy storage in 2013-15

Over 70% of lead demand comes from lead-acid batteries, which are mainly used in electric scooters and cars. We estimate China will remain the largest consumer of lead-acid batteries in 2013-2015, and continue to consume over 40% of the world’s lead. However, the continued increase in American car ownership should compensate for weaker demand for lead-acid batteries as a result of slowing production growth, thereby supporting lead demand. Our GS commodities research team estimates global lead consumption growth of 8% in 2013E.

Exhibit 13: Over 70% of lead is used in lead-acid batteries Exhibit 14: China consumes over 40% of the world’s lead as of 2011 as of 2011

3% 3% 8% 2% Batteries 19.20% China Cable Sheathing 6% Japan Rolled & Extruded 3% 44.50% Korea Rep Shot/Ammunition 15.70% USA Alloys Europe Pigments & Compounds 77% Others Miscellaneous 15.40%

3.90% 1.30%

Source: ILZSG, Gao Hua Securities Research. Source: ILZSG, Gao Hua Securities Research.

Zinc and lead supply and demand will balance out in the medium-to-long term Over the next six months, smelters including South Korea’s Onsan and Peru’s La Oroya will resume production, and the current high levels of world zinc and lead inventories will exert pressure on prices. However, as destocking concludes, and zinc and lead mines halt/reduce production, supply and demand will come into balance, in our view. We estimate zinc and lead prices will rise further in 2013E-2015E. Our 2013E/2014E/2015E price forecasts per ton for zinc are US$2,013 / US$2,175/US$2,200 and lead are US$2,163/US$2,338/US$2,365, in line with our ECS Research team.

Goldman Sachs Global Investment Research 7 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 15: Global zinc supply and demand model

000 tonnes 2009 2010 2011 2012 2013E 2014E 2015E

Global mine supply 11,021 11,817 12,194 13,013 13,159 13,495 13,977 % change -4.0 7.2 3.2 6.7 1.1 2.6 3.6 Including disruption allow. (%) ------0% 3% 4% 4% Global refined supply 11,174 12,288 12,920 13,020 13,300 13,750 14,300 % change -3.2 10.0 5.1 0.8 2.2 3.4 4.0

Global refined consumption 10,136 11,754 12,517 12,672 13,119 13,699 14,316 % change (9.5) 16.0 6.5 0.9 3.9 4.4 4.5 Balance 1,038 534 403 393 181 51 (16) Year end inventory (weeks) 4.8 6.2 6.7 8.3 8.7 8.5 8.1 LME Price ($/ t) 1,655 2,162 2,194 1,950 2,013 2,175 2,200 LME Price (c/lb) 75 98 100 88 91 99 100 Source: Wood Mackenzie, CRU, Goldman Sachs ECS Research estimates.

Exhibit 16: Global lead supply and demand model

000 tonnes 2009 2010 2011 2012 2013E

Refined supply 9,042 9,916 10,600 11,496 12,353 % growth -2% 10% 7% 8% 7% Refined consumption 8,872 10,032 10,547 11,373 12,230 % growth (3.0) 13.0 5.0 8.0 8.0 Global balance 170 (116) 52 123 122 LM E Price (US$/ t) 1,719 2,149 2,402 2,063 2,163 Source: Wood Mackenzie, CRU, Goldman Sachs ECS Research estimates.

For more detailed analysis on global zinc and lead supply and demand, please see our commodities research team’s January 16, 2013, report titled Global Commodities Research: GS Mining Commodity Forecasts for 2013, and Beyond, and April 23, 2013, report Metal Detector: Zinc finding its floor.

China zinc/lead industry: Consolidation likely to cut excess capacity

Zinc and lead supply in China: A two-pronged approach by mines and refineries should hold back blind expansion

The General Office of the State Council released “Comments on Properly Consolidating Metal and non-Metal Mines in Accordance with the Law” from the State Administration of Work Safety on November 4, 2012. The document proposes the government to control unlicensed mining and other illegal activities. Small mines that do not conform to industry policy and unable to ensure safety will be either consolidated or closed in accordance with the law. The restructuring of small mines will help alleviate fragmentation and uncoordinated behavior because 90% or more of China’s zinc and lead mines are small- scale operations, in our view.

Further, we think the recent fallback in zinc prices could limit zinc ore supply growth in China. In our 4-year global supply growth model, which pre-dates the recent market weakness, more than 70% of supply growth came from China. As the majority of small Chinese zinc and lead mines have costs at the upper range of the global zinc and lead cost curve, we think the recent downturn in zinc prices will limit Chinese supply growth.

Goldman Sachs Global Investment Research 8 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 17: Supply from high-cost Chinese zinc mines is Exhibit 18: Since 2012, Chinese zinc production growth under pressure has been generally negative Chinese zinc concentrate accounts for more than 70% of our 10 thousands tonnes; % projected global supply growth over the next four years

8% 60.0 60 Refined zinc production (Lhs) 50 6% yoy (%) 50.0 40 4% 30 40.0 20 2% 30.0 10

0% 0 20.0 ‐10 -2% ‐20 10.0 -4% ‐30 0.0 ‐40 -6% 2009 2010 2011 2012E 2013E 2014E 2015E 2016

Probables (after adj.) China (after disr.) Ex-China (after disr.) Total 08/09 11/09 02/10 05/10 08/10 11/10 02/11 05/11 08/11 11/11 02/12 05/12 08/12 11/12 02/13

Source: Wood Mackenzie, GS Global ECS Research estimates Source: Wind, Gao Hua Securities Research

Tougher environmental standards likely to alleviate uncoordinated expansion by Chinese zinc and lead refiners. Zinc and lead refining is a high-pollution industry. Over the past few years, the majority of environmental accidents attributable to the non-ferrous metals industry were caused by zinc and lead refineries emitting heavy metals in excess of their targets. For example, in 2010 the Shaoguan refinery released excessive amounts of thallium into a river; lead poisoning occurred in 2012 in Renhua county, Guangdong; and further lead poisoning incidents have occurred in Hunan and Shaanxi. We note that small, poorly managed refineries are responsible for the majority of environmental accidents. As such, the government is drawing up “Conditions for Entry into the Zinc and Lead Industry.” The document requires zinc and lead refineries to have minimum annual capacity of 100k tons (50k tons for recycled lead).

Energy saving and emissions reductions targets established for the 12th Five-Year Plan will further eliminate 2 mn tons of zinc and lead refining capacity, in our view. In February of 2013, the Ministry of Industry and Information Technology released “Guidelines for Energy Savings and Emissions Reductions in the Non-Ferrous Metals Industry,” persisting with the closure of high energy, high pollution or outdated capacity. During the 12th Five-Year Plan, the closures will include 1.3 mn tons of lead (including recycled lead) refining capacity and 650k tons of zinc (including secondary zinc) refining capacity. At the same time, we think the construction of new zinc and lead refining capacity in China will slow. Statistics from Asian Metals indicate that in 2012 numerous zinc and lead projects were delayed once zinc and lead prices dropped sharply. They estimate zinc refining capacity will just increase by 340k tons and crude lead capacity will increase 600k tons in 2013.

Goldman Sachs Global Investment Research 9 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 19: Zinc projects to come online in 2013E Exhibit 20: Lead projects to come online in 2013E

Capacity Current Year to Capacity Year to Company Company Province expansion capacity come online expansion come online Huize of Chihong 100 380 2013 Zhuzhou Smelter Group Hunan 100 Jan-13 Hulunbeier Chihong 140 380 2013 Zhantai non-ferrous metals Hunan 100 Mar-13 Western Mining 100 160 2013 Hongling zinc & lead mine Inner Mongolia 100 2013 Total in 2013 340 Hulunbeier Chihong Inner Mongolia 60 2013 Jinding zinc Co. 100 220 2014 Huize of Chihong Yunnan 60 2013 Yunxi zinc Co. 100 120 2014 Luanchuan Shibao mining Henan 80 2013 Xinganmen Boyuan 100 100 2014 Huili zinc & lead 100 100 2014 Hengbang Smelting Co. Shandong 100 2013 Total in 2014 400 Total in 2013 600

Source: Asian Metals, Gao Hua Securities Research estimates Source: Asian Metals, Gao Hua Securities Research estimates

China zinc/lead demand: Urbanization/consumption upgrades likely to be key drivers

Zinc: The completed de-stocking of galvanized sheets may directly drive zinc demand. Since 2009, Chinese production of coated sheets (primarily galvanized sheets) enjoyed sustained growth, increasing from 19.43 mn tons in 2009 to 37.63 mn tons in 2012 (growth of 94%). In terms of inventories, galvanized sheet stocks fell to the average level since 2009, in 2H12. We believe that as the de-stocking process winds down, continued urbanization in China will increase demand from galvanized sheets.

Exhibit 21: Chinese production of coated sheets has risen Exhibit 22: Galvanized sheet inventories have fallen to since 2009 the average level since 2009 Coated sheets are the key demand driver for zinc The end of de-stocking should drive increased zinc demand

4,000 Kt % 100 50 Kt Coated sheets production yoy 45 Galvanized sheets Average from 2009 3,500 80 40 3,000 60 35 2,500 40 30 2,000 25 20 Average from 2009 1,500 20 0 1,000 15 10 500 (20) 5 0 (40) 0 02/09 08/09 02/10 08/10 02/11 08/11 02/12 08/12 02/13 02/09 08/09 02/10 08/10 02/11 08/11 02/12 08/12 02/13

Source: Wind, Gao Hua Securities Research. Source: Wind, Gao Hua Securities Research.

Real estate sales and car production growth continue to support consumption. Data from the National Bureau of Statistics indicates that yoy sales growth for commercial housing in China turned negative for almost a year starting October 2011 but then rebounded strongly to positive growth in October 2012. The rebound was especially pronounced in 1Q13, when yoy growth reached 37%. At the same time, housing sales have driven a clear increase in demand for appliances. In addition, we believe that the auto industry will further support demand. Our China auto analyst expects 2013E/2014E/2015E car sales to grow 8.5%/8.5%8%, maintaining a strong growth rate. In 2H12, dealerships’ inventories declined; restocking has been driving a rebound in car production.

Goldman Sachs Global Investment Research 10 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 23: China property sales maintain strong growth Exhibit 24: As per our China auto analyst, China car sales 10 thousands sqm; % likely to maintain strong growth

Real estate sales area by daily 25 100% 800 200% 80.3% yoy (Rhs) 65.7% 700 51.1% 150% 20 32.5% 35.4% 50% 22.4% 8.0% 600 16.5% 24.1% 8.7% 9.2% 8.5% 17.6 100% 8.5% 500 15 1.7% 13.8% 13.9 0% 7.4% 12.7 15.0 16.3 11.7 400 50% 10 8.6 -50% 300 0% 5.3 5.7 4.3 200 5 -100% 2.6 3.3 ‐50% 2.3 100 0.8 0.8 1.4 0 -150% 0 ‐100%

03/09 09/09 03/10 09/10 03/11 09/11 03/12 09/12 03/13 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Passenger Car Sales Volume Passenger Car growth2012E rate2013E (YoY)2014E 2015E (RHS)

Source: Wind, Gao Hua Securities Research Source: Wind, Gao Hua Securities Research estimates

Lead: Benefiting from consumption upgrades. Broken down by lead’s end users (2011), in China, 28% of lead is used in the manufacture of electric scooters, 22% in the automotive industry, 22% in lead-acid batteries for export and the rest in UPS, motorcycles and other fields.

Compared with other metals, lead’s downstream uses skew towards consumption. As such, we expect that consumption upgrades, increased car sales and the replacement of bicycles with electric scooters in rural areas will drive lead demand growth. We believe production of cars and electric scooters should enjoy sustained growth during 2013-2015.

Exhibit 25: Chinese lead-acid battery production has Exhibit 26: Electric scooter production has increased continued to enjoy strong growth over the past 5 years rapidly in China

200,000 35,000 Production of Lead‐acid batteries Thousands China E‐bike production KvAh 175,955 30,960 180,000 30,000 160,000 142,297 140,695 140,000 25,000 115,735 116,391 120,000 20,000 100,000 15,000 80,000 60,000 10,000 40,000 5,000 20,000 1,530 0 0 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Wind, Gao Hua Securities Research. Source: Wind, Gao Hua Securities Research.

Car starting batteries are the main application for lead-acid batteries, accounting for about 48% of the market as of 2011, and are a type of consumable that require regular replacement. As car ownership increases in China, so will the consumption of batteries. Accordingly, we see China’s increasing car ownership rate as a support for Chinese lead demand.

Goldman Sachs Global Investment Research 11 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 27: Car ownership in China continues to increase rapidly Units: 1 mn cars, %

80.0 Private car ownership in China 30% 73.27 yoy (Rhs) 70.0 25% 60.0 20% 50.0

40.0 15%

30.0 10% 20.0 5% 10.0 7.71

0.0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Wind, Gao Hua Securities Research.

Our supply/demand models for zinc and lead in China

Exhibit 28: China’s zinc supply/demand should trend towards balance in 2013/2014

000t 2009 2010 2011 2012 2013E 2014E

China refined zinc capacity 4,425 5,115 5,720 5,800 6,140 6,540 Capacity utilization (%) 97% 102% 93% 84% 84% 84% China refined zinc production 4,286 5,209 5,308 4,847 5,131 5,466 yoy (%) 6% 22% 2% -9% 6% 7% Net import of refined zinc 641 280 301 509 540 512 Import 670 323 348 515 550 520 Export 29 43 46 6 10 8 China refined zinc supply 4,927 5,489 5,610 5,356 5,671 5,978

China refined zinc demand 4,350 4,850 5081 5285 5,621 5,987 Demand growth (%) 5% 11% 5% 4% 6% 7% Balance 577 639 528 71 50 (9) Source: China Nonferrous Metals Industry Association, Wind, Gao Hua Securities Research estimates.

Exhibit 29: China’s refined lead supply/demand model

000t 2009 2010 2011 2012 2013E 2014E

China refined lead capacity 4,450 4,980 5,382 5,632 5,932 6,232 Capacity utilization (%) 85% 83% 79% 82% 82% 82% China refined lead production 3,773 4,158 4,262 4,646 4,893 5,141 Mined lead production 2,626 2,794 2,836 3,284 3,328 3,290 Recyced lead 1,147 1,364 1,426 1,362 1,566 1,851 Refined lead production yoy (%) 10% 3% 9% 5% 5% Net import of refined lead 134-20503 Import 157 22 7 7 5 7 Export 23 23 6 2 5 4 China refined lead supply 3,907 4,156 4,262 4,651 4,893 5,144

China refined lead demand 3,650 3,950 4005 4510 4,815 5,179 Demand growth (%) 6% 8% 1% 13% 7% 8% Balance 257 206 257 141 78 (35)

Source: China Nonferrous Metals Industry Association, Wind, Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 12 May 14, 2013 China: Metals & Mining: Base Metals

Operations comparison for A-share zinc and lead firms

We compared China’s two main zinc and lead firms—Zhongjin Lingnan and Chihong— across multiple dimensions. We looked at the firms’ 2013-2015 zinc and lead concentrate production growth rate, net profits and sensitivity to zinc and lead prices, production costs and other operational indicators. We further checked firms’ ratio of interest-bearing bonds to total invested capital, among other factors, to examine financial pressure. We evaluated gross margins on zinc and lead operations, ROE and CROCI as indicators of profitability. Our comparisons lead us to conclude: Chihong’s net profits are more sensitive to zinc and lead prices and the firm’s production growth also outpaces Zhongjin Lingnan. Lingnan’s overseas mines have higher operational effectiveness and are more stable.

1. Zinc and lead concentrate production growth: We estimate Chihong‘s zinc and lead concentrate production growth will reach 10.4% CAGR in 2013E-2015E. If Chihong were to successfully complete the rights issue and purchase Rongda Mining, the CAGR would climb to 12% (our base case does not include Rongda). Lingnan is expanding Panlong mine and entering Potosi and Silver Peak mines into service, pushing its 2013-2015 production growth to 6.8% CAGR. That , however, remains below Chihong’s rate.

2. Net profit sensitivity to zinc and lead prices. We measured the sensitivity of firms’ net profits to zinc and lead prices. If zinc and lead prices were to rise by 1%, net profit at Chihong should rise 4%, whereas the figure for Lingnan is about 2.1%. We think Chihong is likely to benefit more, as we expect zinc and lead prices to rise in 2014 and 2015.

Exhibit 30: Chihong has greater organic growth Exhibit 31: Chihong will benefit more from higher prices Sensitivity of net profit to 1% rise in zinc and lead prices

Zinc & Lead concentrate production Zinc & Lead prices sensitivity to 2013 net profit 12.0% growth in 2013-2015 5% 4% 10.4% 4% 10.0% 4% 8.0% 3% 6.8% 3% 6.0% 2% 2% 4.0% 2% 1% 2.0% 1% 0.0% 0% Chihong Lingnan Chihong Lingnan

Source: Company data, Gao Hua Securities Research estimates. Source: Company data, Gao Hua Securities Research estimates.

3. Production costs for zinc and lead concentrate: Lingnan’s primary mine, Fankou, has lead grade 5% and zinc grade 9%. We estimate the firm’s 2013 costs to be Rmb4,966 per ton. In comparison, Huize, Chihong’s primary mine, is of higher quality with lead grade 8.5% and zinc grade 20%. Costs per ton are Rmb4,600, a step below Lingnan’s costs.

4. Gross margins for mining and refining: Lingnan had mining and refining gross margin of 28.5% in 2012 due to slightly higher production costs. That figure is clearly below Chihong’s gross margin, which was 39.2% in 2012.

Goldman Sachs Global Investment Research 13 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 32: We estimate Chihong has lower production Exhibit 33: …and better gross mining and refining cost as of 2013E… margins in 2012

Gross margin of mining/smelting Zinc & Lead concentrate production cost 5,500 45.0% business in 2012 39.2% 40.0% 4,966 5,000 35.0% 4,600 30.0% 28.5% 4,500 25.0% 20.0% 4,000 15.0% 10.0% 3,500 5.0% 0.0% 3,000 Chihong Lingnan Huize mine of Chihong Fankou mine of Lingnan

Source: Company data, Gao Hua Securities Research estimates. Source: Company data, Gao Hua Securities Research.

5. Interest-bearing bonds to total invested capital: We use the ratio of interest-bearing bonds to total invested capital to measure financial cost pressure (total invested capital is the sum of interest-bearing bonds and shareholder equity attributable to their parent firm). As of late 2012, the ratio for Lingnan was 38.6%, where as Chihong’s ratio was76.5%, indicating a significant amount of financial pressure. Chihong’s high gearing ratio is primarily due to recent rapid resource expansion. However, the firm’s plan to raise capital through a rights offering has been approved by CSRC on March 15. If the rights issue were to be successfully completed, it could help lower Chihong’s interest-bearing bond to total invested capital ratio to about 45%, alleviating financial pressure once bank loans are returned.

6. Assets acquired overseas and operations: Lingnan and Chihong, aside from developing domestic resources, have in recent years continued to look for growth abroad. Lingnan in 2009 acquired Perliya during the financial crisis and that year moved from losses to profit; in 2010 it again leveraged the Perliya platform to acquire GlobeStar mine and began to develop a variety of metals. Profitability also became more stable. Chihong in 2010 became involved with one of the world’s biggest zinc and lead mines—Canada’s Selwyn zinc and lead mine, which is scheduled to enter service in 2015/2016. Further, Chihong announced in 2012 that it had acquired a zinc and lead mine in Bolivia. Overall, Lingnan’s overseas operations already account for 25% (2012) of the company’s net earnings and operational effectiveness is higher while Chihong’s overseas assets are still under construction.

Exhibit 34: Lingnan is under less financial pressure Exhibit 35: Comparison of overseas acquisitions and Lingnan has a more stable asset and debt structure as of operational status 2012 Lingnan’s overseas operational efficiency is higher

Company Overseas resources Operation Interest-bearing debt/total invested capital 90.0% Scheduled to come online in Selyw n in Canada 76.5% 2015/2016 80.0% Chihong Announced in Dec 2012 while not 70.0% Zinc & Lead projects in Bolivia complete yet 60.0% Made profit in the purchasing Perilya in Australia 50.0% year of Perilya; Profit also 38.6% Lingnan improved for Globestar; both of 40.0% Globestar them contribute Rmb90 mn 30.0% (25%) of net profit in 2012 20.0% 10.0% 0.0% Chihong Lingnan

Source: Company data, Gao Hua Securities Research estimates. Source: Company data, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 14 May 14, 2013 China: Metals & Mining: Base Metals

7. ROE: We expect Lingnan’s ROE to rise to 9.1% in 2013E as zinc and lead prices increase and the negative influence of environmental accidents fades. That figure outpaces Chihong’s ROE, which we estimate to be 8.2% in 2013E.

8. CROCI: We estimate Lingnang’s 2013E CROCI will edge up to 11.6% and remain in the sector’s second quartile for the next three years. For Chihong, which continues to invest significant sums into new mines, we expect CROCI to slip to 9.3%, placing it in the sector’s third quartile.

Exhibit 36: Lingnan’s ROE should outpace Chihong in Exhibit 37: Lingnan’s CROCI is also outpacing Chihong in 2013E 2013E

2013E ROE 9.5% 12.0% 2013E CROCI 11.6% 9.1% 11.5% 9.0% 11.0% 10.5% 8.5% 10.0% 8.2% 9.5% 9.3% 8.0% 9.0% 8.5% 7.5% 8.0% 7.5% 7.0% 7.0% Chihong Lingnan Chihong Lingnan

Source: Company data, Gao Hua Securities Research estimates. Source: Company data, Gao Hua Securities Research estimates.

Using Director’s Cut to value zinc and lead firms

We use Director’s Cut methodology for valuing A-share zinc and lead firms, in line with our other covered commodity stocks. Based on current valuations, the non- ferrous metals’ industry average EV/GCI vs. CROCI/WACC is 1.0X.

Cash returns on cash invested (CROCI) is a key measure of a firm’s ability to create value. By comparing firm’s past-three-years and 2013E-2014E CROCI, we divide non-ferrous metals A-shares into quartiles, with the highest-CROCI firms in the first quartile, and the lowest-CROCI firms in the fourth quartile.

Exhibit 38: A-share metal firms’ CROCI Gold firms have higher CROCI while aluminum firms have lower CROCI

Ticker Company 2010 2011 2012 2013E 2014E 2015E 600362.SS Jiangxi Copper 222222 000630.SZ Tongling 334333 000878.SZ Yunnan Copper 242444 000060.SZ Zhongjin Lingnan 423222 600497.SS Chihong 333333 601600.SS Chalco 444444 600489.SS Zhongjin Gold 111111 600547.SS Shandong Gold 111111 601899.SS Zijin Mining 111111

Source: Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 15 May 14, 2013 China: Metals & Mining: Base Metals

We use the Director’s Cut valuation method to assign target prices

We multiply average 2013-2014 CROCI/WACC with the industry average ValRatio (trend line slope) to obtain target EV/GCI for listed firms. We then assign a premium or discount to each firm based on the firms’ free cash flows and valuation premium relative to the industry over the past four years, and use that premium to derive a 12-month target price for each company.

Chihong (600497.SS): We assign a 9% valuation premium to Chihong. Over the past four years (2009-2012), Chihong has enjoyed an average premium of 9% relative to the industry, and currently has a 3% premium for 2013E. We estimate the firm’s CROCI will remain in the third quartile for 2013E-2014E (see Exhibit 38). However, we believe the valuation premium will increase to historic levels as Chihong has basically completed its planned resource layout for the 12th Five-Year Plan, and release of capacity currently under construction will drive a zinc and lead production CAGR for 2013E-2015E of up to 10.4% (not including Rongda Mining), and a net profit CAGR of 13%, in our view. Furthermore, CSRC has approved the firm’s rights issue for the purchase of Rongda Mining. Based on this 9% premium, we arrive at a 12-month Director’s Cut-based target price of Rmb10.41.

Zhongjin Lingnan (000060.SZ): We do not assign a premium/discount to Zhongjin Lingnan, which is an improvement over its average 4% discount over the past four years (2009-2012). This is largely because we believe the firm’s production has returned to normal, following corrections at the Shaoguan and Danxia refineries, which suffered environmental incidents in 2010 and 2012. In addition, the firm’s overseas expansion resources and management capabilities lead the industry. We estimate the firm’s CROCI will increase in 2013E, but will remain in the second quartile (see Exhibit 38). Therefore, we believe the firm’s discount will close out, and hence we assign a 12-month Director’s Cut- based target price of Rmb8.6. Exhibit 39: Director’s Cut valuation of A-share nonferrous metal firms (2013E) Usually stocks above the sector average line appear overvalued on a sector-relative basis, and stocks below the line appear undervalued. When the sector average is below the 1:1 line, the sector appears undervalued on Director’s Cut; when above, the sector appears overvalued. 3.0x y = 1.0 x R² = 0.6 2.5x Shandong Gold

2.0x Zhongjin Gold EV/GCI 1.5x Chihong Zijin (A) Yunnan Copper Lingnan JXC (A) 1.0x Tongling Chalco

0.5x

0.0x 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x

BUY Neutral Sell CROCI/WACC

Source: Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 16 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 40: Director’s Cut derivation of 12-month target prices; we rate both Chihong and Zhongjin Lingnan Neutral

Zhongjin Lingnan Chihong Ave CROCI (2013E-2014E) 11.5% 9.2% Sector Valratio (EV/GCI vs. CROCI/WACC) 1.0x 1.0x Valuation prem./disc.Adjustment 0% 9% Historical premium/discount -4% 9% Adjusted Valratio 1.0x 1.1x CROCI/WACC (2013E-2014E) 1.4x 1.2x Target EV/GCI 1.5x 1.3x GCI (mn) 14,613 22,102 Minority interests 1,611 2,529 Net debt 2,099 12,231 MV (pricing currency mn) 17,743 13,635 Share outstanding (mn) 2,063 1,310 12M Target price 8.60 10.41 Rating Neutral Neutral Potential upside (%) -4.1% -12.5% Current price (2013/5/10) 9.0 11.9

Source: Company data, Datastream, Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 17 May 14, 2013 China: Metals & Mining: Base Metals

Chihong (600497.SS, Neutral): Resources acquired, awaiting profits

Investment view Investment Profile We resume coverage on Chihong with a Neutral rating and a 12-m Low High Director’s Cut-based target price of Rmb10.41, implying 12.5% downside Growth Growth Returns * Returns * potential. We believe the firm’s core growth driver will be the release of Multiple Multiple capacity from acquired mines beginning production. In addition, we Volatility Volatility believe the potential acquisition and consolidation of Rongda Mining Percentile 20th 40th 60th 80th 100th through a rights issue, if successfully completed, could be accretive to Yunnan Chihong Zinc & Germanium (600497.SS) earnings, and help lower the firm’s financial cost. However, with the Asia Pacific Metals & Mining Peer Group Average * Returns = Return on Capital For a complete description of the investment firm’s 2013E/2014E CROCI in the third quartile, and a 2013E P/E ratio of profile measures please refer to the disclosure section of this document. 48.9X—above the industry median—we assign a Neutral rating.

Key data Current Key growth drivers Price (Rmb) 11.89 12 month price target (Rmb) 10.41 The firm may meet its 12th Five-Year Plan resource target early. Market cap (Rmb mn / US$ mn) 15,577.0 / 2,536.3 At the end of 2009, Chihong set strategic targets for the 12th Five-Year Foreign ownership (%) -- Plan: zinc and lead resources reaching 10mt by 2015, and refining 12/12 12/13E 12/14E 12/15E capacity of 1mt. Over the past three years, the firm has expanded its EPS (Rmb) 0.27 0.24 0.32 0.39 EPS growth (%) 1.6 (8.5) 29.8 22.5 resources through domestic consolidation and overseas purchases. In EPS (diluted) (Rmb) 0.27 0.24 0.32 0.39 EPS (basic pre-ex) (Rmb) 0.27 0.24 0.32 0.39 terms of smelting production, the Huize 160k t smelting project is P/E (X) 52.6 48.9 37.7 30.8 scheduled to begin production in 2H13, and the 200k t Hulunbuir facility P/B (X) 4.8 4.0 3.7 3.5 EV/EBITDA (X) 24.2 14.9 13.5 13.0 is slated to start operations in late 2013. Dividend yield (%) 1.4 1.0 1.3 1.6 ROE (%) 9.3 8.2 10.3 11.7 CROCI (%) 10.5 9.3 9.1 8.9 Potential acquisition and consolidation of Rongda Mining could be earnings accretive. Chihong’s application for a rights issue has been approved by the CSRC on March 15, and it plans to use Rmb2.1 bn for acquiring a 51% stake in Rongda Mining held by the parent company Price performance chart 17 2,700

Yunnan Metallurgical Group (our base case does not include assets from 16 2,600 Rongda Mining). Rongda had net profits attributable to the parent 15 2,500 company of Rmb363 mn in 2012, 51% of which would imply Rmb185 14 2,400 13 2,300 mn. If Chihong’s rights issue and Rongda acquisition were to be 12 2,200 successfully completed, we estimate Rongda could potentially 11 2,100 contribute Rmb0.11 to Chihong’s 2013E EPS. Furthermore, the company 10 2,000 May-12 Aug-12 Nov-12 Feb-13 announced that the rights issue will raise not more than Rmb5 bn, of which Rmb2.1 bn will be used to acquire the 51% stake in Rongda, and Yunnan Chihong Zinc & Germanium (L) Shanghai SE A Share Index (R) the rest will be deposited in the bank, potentially lowering the firm’s asset-liability ratio to around 53%. Share price performance (%) 3 month 6 month 12 month Absolute (24.1) (1.9) (24.5) Rel. to Shanghai SE A Share Index (17.8) (9.6) (19.0) Valuation Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 5/10/2013 close.

From 2009-2012, Chihong saw a 9% valuation premium on average. It is currently at 3%; but we think if the rights issue were to be successfully completed, earnings updates post the potential purchase of Rongda may help raise the premium closer to the historical average. We apply a 9% INVESTMENT LIST MEMBERSHIP valuation premium and arrive at our 12-month Director’s Cut-based Neutral target price of Rmb10.41.

Coverage View: Neutral Risks Downside: An “environmental tax” levied on the firm’s products; Upside: Faster-than-expected progress on projects under construction.

Goldman Sachs Global Investment Research 18 May 14, 2013 China: Metals & Mining: Base Metals

Yunnan Chihong Zinc & Germanium: Summary financials

Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E

Total revenue 12,130.4 16,558.8 19,759.2 21,342.4 Cash & equivalents 1,171.0 1,205.1 1,466.4 1,221.5 Cost of goods sold (10,287.1) (14,526.3) (17,492.7) (18,903.6) Accounts receivable 1,296.7 1,879.0 1,910.4 2,182.6 SG&A (848.5) (853.6) (951.9) (1,024.3) Inventory 1,277.0 1,906.8 1,927.2 2,216.0 R&D ------Other current assets 0.0 0.0 0.0 0.0 Other operating profit/(expense) (57.4) (47.9) (53.5) (57.5) Total current assets 3,744.7 4,990.9 5,304.0 5,620.2 EBITDA 1,324.9 2,039.8 2,184.6 2,298.4 Net PP&E 12,234.1 13,195.5 13,474.3 13,814.4 Depreciation & amortization (387.5) (908.9) (923.5) (941.4) Net intangibles 5,215.8 5,001.4 4,787.1 4,572.7 EBIT 937.4 1,130.9 1,261.1 1,357.0 Total investments 819.3 819.3 819.3 819.3 Interest income 8.2 14.5 14.9 18.1 Other long-term assets 204.4 279.0 332.9 359.6 Interest expense (600.8) (755.6) (770.2) (755.6) Total assets 22,218.3 24,286.1 24,717.6 25,186.2 Income/(loss) from uncons. subs. 39.4 0.0 0.0 0.0 Others 32.1 0.0 0.0 0.0 Accounts payable 2,794.3 3,573.4 4,094.7 4,191.8 Pretax profits 416.4 389.8 505.8 619.5 Short-term debt 7,587.8 8,087.8 7,587.8 7,587.8 Income tax (74.6) (77.1) (100.0) (122.5) Other current liabilities 0.0 0.0 0.0 0.0 Minorities 6.1 5.5 7.2 8.8 Total current liabilities 10,382.1 11,661.1 11,682.4 11,779.6 Long-term debt 4,848.5 5,348.5 5,348.5 5,348.5 Net income pre-preferred dividends 347.9 318.2 413.0 505.8 Other long-term liabilities 619.8 846.1 1,009.6 1,090.5 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 5,468.3 6,194.5 6,358.0 6,438.9 Net income (pre-exceptionals) 347.9 318.2 413.0 505.8 Total liabilities 15,850.3 17,855.6 18,040.5 18,218.5 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 347.9 318.2 413.0 505.8 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 3,833.2 3,901.3 4,155.2 4,454.5 EPS (basic, pre-except) (Rmb) 0.27 0.24 0.32 0.39 Minority interest 2,534.7 2,529.2 2,522.0 2,513.2 EPS (basic, post-except) (Rmb) 0.27 0.24 0.32 0.39 EPS (diluted, post-except) (Rmb) 0.27 0.24 0.32 0.39 Total liabilities & equity 22,218.3 24,286.1 24,717.6 25,186.2 DPS (Rmb) 0.19 0.12 0.16 0.19 Dividend payout ratio (%) 71.9 50.0 50.0 50.0 BVPS (Rmb) 2.93 2.98 3.17 3.40 Free cash flow yield (%) (5.6) (4.0) 5.1 (0.2)

Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E Sales growth 92.1 36.5 19.3 8.0 CROCI (%) 10.5 9.3 9.1 8.9 EBITDA growth 22.6 54.0 7.1 5.2 ROE (%) 9.3 8.2 10.3 11.7 EBIT growth 34.6 20.6 11.5 7.6 ROA (%) 1.9 1.4 1.7 2.0 Net income growth (3.1) (8.5) 29.8 22.5 ROACE (%) 5.6 5.0 5.5 5.9 EPS growth 1.6 (8.5) 29.8 22.5 Inventory days 54.0 40.0 40.0 40.0 Gross margin 15.2 12.3 11.5 11.4 Receivables days 47.1 35.0 35.0 35.0 EBITDA margin 10.9 12.3 11.1 10.8 Payable days 97.7 80.0 80.0 80.0 EBIT margin 7.7 6.8 6.4 6.4 Net debt/equity (%) 176.9 190.2 171.8 168.1 Interest cover - EBIT (X) 1.6 1.5 1.7 1.8

Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E Net income pre-preferred dividends 347.9 318.2 413.0 505.8 D&A add-back 387.5 908.9 923.5 941.4 P/E (analyst) (X) 52.6 48.9 37.7 30.8 Minorities interests add-back (6.1) (5.5) (7.2) (8.8) P/B (X) 4.8 4.0 3.7 3.5 Net (inc)/dec working capital 84.1 (433.1) 469.5 (463.9) EV/EBITDA (X) 24.2 14.9 13.5 13.0 Other operating cash flow 546.0 151.7 109.6 54.2 EV/GCI (X) 1.6 1.4 1.3 1.2 Cash flow from operations 1,359.4 940.1 1,908.4 1,028.8 Dividend yield (%) 1.4 1.0 1.3 1.6

Capital expenditures (2,534.5) (1,655.9) (988.0) (1,067.1) Acquisitions (1,433.7) 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others (138.4) 0.0 0.0 0.0 Cash flow from investments (4,106.6) (1,655.9) (988.0) (1,067.1)

Dividends paid (common & pref) (196.5) (250.1) (159.1) (206.5) Inc/(dec) in debt 3,815.6 1,000.0 (500.0) 0.0 Common stock issuance (repurchase) 421.8 0.0 0.0 0.0 Other financing cash flows (789.2) 0.0 0.0 0.0 Cash flow from financing 3,251.6 749.9 (659.1) (206.5) Total cash flow 504.4 34.1 261.3 (244.8) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 19 May 14, 2013 China: Metals & Mining: Base Metals

Resource strategy promotes sustained growth

Chihong has the potential to meet its resource goals early. At the end of 2009, Chihong set strategic targets for the 12th Five-Year Plan: zinc and lead resources reach 10mt by 2015, and refining capacity of 1mt. Over the past three years, the firm has expanded its resources: In April 2011, it purchased Yongchang mine, Lancang Lead mine and Daxing’anling Mining, increasing its zinc and lead holdings by 1.32mt; in 2011, it also purchased Jinxin Mining, increasing its zinc and lead holdings by 155k t; in December 2012, it announced the purchase of Bolivian Yangfan mine, D Copper mine, and Amazon Mining; in March 2013, the firm signed an agreement with Selwyn to purchase the remaining 50% equity stake in the Selwyn-Chihong joint venture; further, Chihong’s application for a rights issue has been approved by the CSRC on March 15, and it plans to use the money raised to acquire 51% stake in Rongda Mining. We believe that, if the above projects all progress smoothly, the firm has the potential to increase its resource holdings from 3mt in 2009 to 10mt in 2013, meeting its 12th Five-Year Plan resource targets early.

Exhibit 41: Zinc and lead reserves controlled by the firm, as of 2012

Ore Grade Resources Zinc & Lead mines Equity Kt Zinc (%) Lead (%) Silver (g/ t) Zinc (kt) Lead (kt) Silver (t) Huize mine 100% 3,756 20.2% 8.5% 757 321 0 Zhaotong Yiliang mine 100% 1,610 14.0% 3.0% 46.0 225 48 74 Yongchang mine 93% 5,318 7.3% 3.0% 159.5 397 173 33 Lancang mine 100% 5,619 3.3% 4.6% 156.7 280 272 1,206 Daxing'anling Mining 100% 7,240 2.1% 0.7% 149 52 Jinxin mining 100% 4,081 3.5% 0.3% 142 13 442 Hulunbuir Chihong 50% Selwyn in Canada 50% 16,063 10.3% 4.2% 1,646 679 Total 3,598 1,558 1,755

Source: Company data, Gao Hua Securities Research

Exhibit 42: Zinc and lead projects with announced purchases in progress, as of March 2013

Ore Resources Zinc & Lead mines Equity Kt Zinc (kt) Lead (kt) Silver (t) Copper (kt) Mines announced to acquire Rongda mine 51% 526 426 2,057 49 D copper mine in Bolivia 835 Yangfan mine in Bolivia 817 Amazon mining in Bolivia 1,007

Source: Company data, Gao Hua Securities Research.

Smelting capacity is likely to be released gradually over the next two years. The firm’s 160k t Huize refinery project (60k t/a crude lead, 100k t/a refined zinc and comprehensive slag utilization process) is scheduled to begin trial production, and is likely to begin normal production in 2H13. The 200k t Hulunbuir refinery (140k t/a zinc, 60k t/a lead refining) is likely to begin production at the end of 2013, according to the company.

Goldman Sachs Global Investment Research 20 May 14, 2013 China: Metals & Mining: Base Metals

Potential consolidation of Rongda accretive to earnings

The firm’s application for a rights issue was approved by the CSRC on March 15, and Chihong has announced that it will use the money raised to acquire Yunnan Metallurgical Group’s 51% stake in Rongda Mining (our base case does not include assets from Rongda). Rongda and its wholly owned subsidiary Yishengyuan Mining have approval for four mines with total zinc and lead reserves of 952k t, 2057 t of silver, and 49k t of copper. In 2012, Rongda realized net profits attributable to the parent company of Rmb363 mn, with a 51% stake implying Rmb185 mn. Assuming Chihong’s rights issue and Rongda purchase were to be successfully completed, on Chihong’s 2012 earnings it would about 15% accretive. We believe the potential rights issue could also improve the firm’s asset-liability structure, lowering financial costs. As of end-2012, Chihong had an asset-liability ratio of 71%, with interest-bearing debt of over Rmb12 bn. Financial costs for the firm in 2012 reached Rmb600 mn, significantly higher than the firm’s 2012 net profit attributable to the parent company of Rmb350 mn. Based on the company’s announcements, the rights issue will raise not more than Rmb5 bn, of which Rmb2.1 bn will be used to acquire the 51% stake in Rongda, and the rest will be deposited in the bank. We calculate that this could lower the firm’s asset-liability ratio to 53%, saving approximately Rmb180 mn in financial costs in 2013.

Exhibit 43: Scenario analysis: EPS after potential Exhibit 44: Asset-liability ratio before and after potential consolidation of Rongda (based on share capital after rights issue, as of 2012 rights issue)

0.32 80% 2012 EPS 0.31 71% Asset-liability ratio 70% 0.3 60% 53%

0.28 50% 0.27 40%

0.26 30%

20% 0.24 10%

0.22 0% No consolidation Consolidated Rongda mine No consolidation Consolidated Rongda mine

Source: Company data, Gao Hua Securities Research estimates. Source: Company data, Gao Hua Securities Research estimates.

Further profit contributions will have to wait until capacity release from the purchased overseas resources. Although the firm has increased its resources relatively rapidly over the past few years, earnings from the Yongchang and Lancang zinc and lead mines have been relatively weak due to geologic conditions; Jinxin Mining has just received resource registration; Selwyn-Chihong Mining is scheduled to begin production at the end of 2015, contributing in 2016. Therefore, we estimate relatively slow 2013E/2014E zinc and lead concentrate production growth (8.1%/8.0% from7.8% in 2012), while the start of zinc and lead concentrate production at Selwyn-Chihong would potentially lead to a 15.2% growth in 2015E.

Goldman Sachs Global Investment Research 21 May 14, 2013 China: Metals & Mining: Base Metals

Scattered metals are an important source of profits

The company’s key scattered metals include germanium and cadmium. Presently, Chihong has 30 tons of annual germanium capacity and is constructing 800 tons of annual cadmium capacity.

Chihong’s main germanium products are pure germanium and germanium dioxide, and most of which are used in optical instruments or military applications, with stable orders. In 2011, Chihong produced 5.56 tons of pure germanium and 11.64 tons of germanium dioxide, accounting for 6.2% of gross earnings. In 2012, we estimate Chihong sold only 10 tons of germanium products and the contribution to gross earnings declined to 2% as prices and sales volumes declined. But germanium prices have been among the strongest performers in metals in 2013, rising 7% since the start of the year. As a result, we expect the contribution of germanium products to earnings to increase.

Exhibit 45: Price trends for germanium products Exhibit 46: Price trends for cadmium ingot

14000 Rmb/t Germanium oxide 99.99% min 40000 Cadmium ingot Rmb/t 12000 Germanium metal 99.99% min 35000 30000 10000 25000 8000 20000 6000 15000 4000 10000

2000 5000

0 0 05/09 11/09 05/10 11/10 05/11 11/11 05/12 11/12 05/13 05/09 11/09 05/10 11/10 05/11 11/11 05/12 11/12 05/13

Source: Asian Metals, Gao Hua Securities Research. Source: Asian Metals, Gao Hua Securities Research.

Potential environmental tax on lead may be a headwind for Chihong

The Economic Information newspaper reported on March 12, 2013, that the Ministry of Finance will accelerate reforms to the environmental protection tax. The move will place an environmental protection tax on products that contain lead or other highly polluting materials. In 2012, lead products accounted for 8% of Chihong’s total income (not including lead product trade income). We perform a scenario analysis on the environmental protection tax rate as below.

Exhibit 47: Scenario analysis of the impact of an environmental tax on Chihong in 2013 Our base case is no environmental tax

Base case - No Environmental tax rate environmental tax 1% 3% 5% Net profit changes (%) 0 -2.0% -6.2% -10.3%

Source: Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 22 May 14, 2013 China: Metals & Mining: Base Metals

Director’s Cut target price of Rmb10.41; Neutral rating

CROCI to remain in the third quartile. We think Chihong’s strong organic growth will help its net profit growth rate outpace Lingnan, its peer. Despite this, we believe Chihong’s 2013E/2014E/2015E CROCI will edge down to 9.3%/9.1%/8.9%, from 10.5% in 2012, primarily because the firm will continue to make significant capital expenditures over this period and the release of capacity from mines under construction will likely be slow.

Chihong’s EV/GCI vs. CROCI/WACC premium relative to the industry is likely to rise to its historical average. Over the past four years (2009-2012), Chihong averaged a 9% premium to the industry, but at present that premium has slipped to 3%. But we think its premium is likely to climb to its historical average, because the company has completed its resource layout for the 12th Five-Year plan and capacity from mines under construction should drive zinc and lead ore concentrate production growth of 10.4% CAGR from 2013E- 2015E (not including Rongda). Further, the CSRC has already approved Chihong’s rights offering to acquire Rongda, the successful completion of which would also support Chihong’s premium, in our view.

We derive our 12-m Director’s Cut target price of Rmb10.41 and resume coverage with a Neutral rating. Our 12-month target price of Rmb10.41 is based on a target premium of 9%. Our target price implies 12.5% potential downside.

Exhibit 48: Chihong’s historical P/E band Exhibit 49: Chihong’s historical P/B band

90 Share price 0.50X 1.50X 2.50X PE Ave.PE +1Stdev ‐1Stdev 3.50X 4.50X 6.50X 250 80

70

200 60

50 150 40

100 30

20 50 10

0 May/05 May/06 May/07 May/08 May/09 May/10 May/11 May/12 May/13 0 Nov/05 Nov/06 Nov/07 Nov/08 Nov/09 Nov/10 Nov/11 Nov/12 May‐07 May‐08 May‐09 May‐10 May‐11 May‐12 May‐13

Source: Bloomberg, Gao Hua Securities Research estimates. Source: Bloomberg, Gao Hua Securities Research estimates.

Goldman Sachs Global Investment Research 23 May 14, 2013 China: Metals & Mining: Base Metals

Zhongjin Lingnan (000060.SZ, Neutral): Back to normal operations

Investment view Investment Profile We resume coverage on Lingnan with a Neutral rating and our 12-month Low High Growth Growth Director’s Cut-based target price of Rmb8.6, implying 4% potential Returns * Returns * downside. Lingnan successfully acquired Perliya and GlobeStar Multiple Multiple overseas in 2009 and 2010, and their earnings improved significantly Volatility Volatility under Lingnan. However, environmental accidents negatively impacted Percentile 20th 40th 60th 80th 100th development over the past two years, and production has recently Shenzhen Zhongjin Lingnan Nonfemet (000060.SZ) recovered. We expect Lingnan’s CROCI to remain in the second quartile Asia Pacific Metals & Mining Peer Group Average * Returns = Return on Capital For a complete description of the investment over the next two years on the back of resumption of normal operations. profile measures please refer to the disclosure section of this document. Currently, 2013E P/E is 34.9X, slightly above the 5-year average of 28.7X.

Key data Current Key growth drivers Price (Rmb) 8.97 12 month price target (Rmb) 8.60 Overseas expansion and operational results demonstrate strong Market cap (Rmb mn / US$ mn) 18,504.6 / 3,012.9 execution skills. During 2008-2009, Lingnan acquired 50.1% of Perliya for Foreign ownership (%) -- Rmb200 mn. Perliya then moved into profitability. In 2010, Lingnan used 12/12 12/13E 12/14E 12/15E Perliya as a platform to successfully acquire GlobeStar, which significantly EPS (Rmb) 0.21 0.26 0.28 0.29 EPS growth (%) (54.5) 22.5 10.6 0.6 improved earnings in 2011. In 2012, overseas mines raised their share of EPS (diluted) (Rmb) 0.21 0.26 0.28 0.29 EPS (basic pre-ex) (Rmb) 0.21 0.26 0.28 0.29 Lingnan’s net profits to 25% from 15% in 2011. P/E (X) 41.7 34.9 31.6 31.4 P/B (X) 3.2 3.1 2.8 2.6 Diverse metal resources support strategy of stable development. EV/EBITDA (X) 13.1 11.7 10.9 10.8 Dividend yield (%) 0.5 0.6 0.7 0.7 In 2013, we estimate Panlong mine’s zinc and lead concentrate production ROE (%) 7.9 9.1 9.3 8.7 CROCI (%) 10.1 11.6 11.4 10.9 to be 26.7k tons and the opening of the Perilya Potosi/Silver Peak projects also to contribute 17k tons of zinc and lead concentrate. In addition,

Lingnan acquired GlobeStar and added 123k tons of copper resources from Cerro de Maimon, 93k tons of nickel resources from Cumpie Hill, and 201k Price performance chart 12.0 1,250 tons of lithium from Moblan. Diversified resources should make earnings 11. 5 1,200 11. 0 1,150 more defensive when zinc and lead prices are low and support Lingnan’s 10.5 1,100 10.0 1,050 stable development, in our view. 9.5 1,000 9.0 950 8.5 900 Returning to normalcy after environmental accidents. In 2010, 8.0 850 Lingnan’s Shaoguan refinery water discharges into a river resulted in 7. 5 800 7. 0 750 thallium levels exceeding targets. The government required that the May-12 Aug-12 Nov-12 Feb-13 refinery be closed entirely for corrections and the crude smelting system Shenzhen Zhongjin Lingnan Nonfemet (L) Shenzhen A Index (R) was unable to resume transitional operations until September 2012. In March 2012, Danxia refinery was closed for 3 months and Fankou mine Share price performance (%) 3 month 6 month 12 month closed for 1 month due to lead poisoning. Lingnan has recently returned Absolute (20.5) 18.2 (7.6) Rel. to Shenzhen A Index (20.6) 1.0 (7.8) to normal operations. Furthermore, its second largest shareholder— Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 5/10/2013 close. Guangsheng Investment and Development—increased its stake by purchasing 6.94mn shares (0.34%) during Dec 21, 2012 to Feb 7, 2013 to

6.85%, which we think reflects its confidence in Lingnan’s robust outlook. INVESTMENT LIST MEMBERSHIP Valuation Neutral From 2009-2012, Lingnan’s EV/GCI vs. CROCI/WACC was at 4% discount relative to the industry, which widened to 5% in 2013. We think the Coverage View: Neutral discount is likely to disappear as the firm returns to normal operations after accidents in 2010 and 2012, and its CROCI remaining steady in the second quartile during 2013-2014.

Risks Downside: Environmental problems continuing to influence production; Upside: New progress in overseas expansion.

Goldman Sachs Global Investment Research 24 May 14, 2013 China: Metals & Mining: Base Metals

Shenzhen Zhongjin Lingnan Nonfemet: Summary financials

Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E

Total revenue 18,440.1 19,608.0 20,817.0 21,656.8 Cash & equivalents 1,190.5 1,336.7 1,130.7 1,368.3 Cost of goods sold (16,247.9) (17,196.5) (18,289.3) (19,208.9) Accounts receivable 964.9 1,288.1 1,103.8 1,384.6 SG&A (991.2) (1,090.4) (1,142.9) (1,106.8) Inventory 2,040.1 2,655.7 2,338.5 2,906.8 R&D ------Other current assets 282.2 300.1 318.6 331.5 Other operating profit/(expense) (185.2) (199.1) (208.7) (202.1) Total current assets 4,477.7 5,580.6 4,891.6 5,991.1 EBITDA 1,668.2 1,895.9 1,977.5 1,993.7 Net PP&E 4,465.1 4,829.5 5,209.2 5,569.2 Depreciation & amortization (652.5) (773.8) (801.4) (854.7) Net intangibles 3,733.5 3,379.6 3,031.2 2,682.7 EBIT 1,015.7 1,122.0 1,176.1 1,139.0 Total investments 222.6 222.6 222.6 222.6 Interest income 10.9 10.9 12.2 10.3 Other long-term assets 1,174.2 1,248.6 1,325.6 1,379.1 Interest expense (279.0) (265.9) (227.2) (188.5) Total assets 14,073.2 15,260.9 14,680.1 15,844.7 Income/(loss) from uncons. subs. 31.1 0.0 0.0 0.0 Others (90.2) 0.0 0.0 0.0 Accounts payable 1,541.0 2,067.0 1,770.3 2,260.0 Pretax profits 688.5 867.0 961.1 960.8 Short-term debt 2,884.6 2,884.6 2,384.6 2,384.6 Income tax (154.5) (203.8) (225.9) (225.8) Other current liabilities 562.4 562.4 562.4 562.4 Minorities (101.2) (133.0) (148.8) (145.3) Total current liabilities 4,988.0 5,514.0 4,717.3 5,207.0 Long-term debt 551.4 551.4 51.4 51.4 Net income pre-preferred dividends 432.8 530.3 586.5 589.7 Other long-term liabilities 1,440.8 1,532.0 1,626.5 1,692.1 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,992.1 2,083.4 1,677.9 1,743.5 Net income (pre-exceptionals) 432.8 530.3 586.5 589.7 Total liabilities 6,980.1 7,597.4 6,395.1 6,950.4 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 432.8 530.3 586.5 589.7 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 5,615.1 6,052.6 6,525.3 6,989.3 EPS (basic, pre-except) (Rmb) 0.21 0.26 0.28 0.29 Minority interest 1,477.9 1,610.9 1,759.7 1,904.9 EPS (basic, post-except) (Rmb) 0.21 0.26 0.28 0.29 EPS (diluted, post-except) (Rmb) 0.21 0.26 0.28 0.29 Total liabilities & equity 14,073.2 15,260.9 14,680.1 15,844.7 DPS (Rmb) 0.05 0.06 0.06 0.06 Dividend payout ratio (%) 21.4 21.4 21.4 21.4 BVPS (Rmb) 2.72 2.93 3.16 3.39 Free cash flow yield (%) 1.1 1.2 4.5 1.8

Growth & margins (%) 12/12 12/13E 12/14E 12/15E Ratios 12/12 12/13E 12/14E 12/15E Sales growth (1.2) 6.3 6.2 4.0 CROCI (%) 10.1 11.6 11.4 10.9 EBITDA growth (31.6) 13.6 4.3 0.8 ROE (%) 7.9 9.1 9.3 8.7 EBIT growth (44.8) 10.5 4.8 (3.2) ROA (%) 3.1 3.6 3.9 3.9 Net income growth (54.5) 22.5 10.6 0.6 ROACE (%) 8.0 9.0 9.3 9.0 EPS growth (54.5) 22.5 10.6 0.6 Inventory days 49.8 49.8 49.8 49.8 Gross margin 11.9 12.3 12.1 11.3 Receivables days 21.0 21.0 21.0 21.0 EBITDA margin 9.0 9.7 9.5 9.2 Payable days 38.3 38.3 38.3 38.3 EBIT margin 5.5 5.7 5.6 5.3 Net debt/equity (%) 31.7 27.4 15.8 12.0 Interest cover - EBIT (X) 3.8 4.4 5.5 6.4

Cash flow statement (Rmb mn) 12/12 12/13E 12/14E 12/15E Valuation 12/12 12/13E 12/14E 12/15E Net income pre-preferred dividends 432.8 530.3 586.5 589.7 D&A add-back 652.5 773.8 801.4 854.7 P/E (analyst) (X) 41.7 34.9 31.6 31.4 Minorities interests add-back 101.2 133.0 148.8 145.3 P/B (X) 3.2 3.1 2.8 2.6 Net (inc)/dec working capital 363.9 (412.8) 204.7 (359.4) EV/EBITDA (X) 13.1 11.7 10.9 10.8 Other operating cash flow (63.4) (1.0) (1.0) (0.7) EV/GCI (X) 1.6 1.5 1.4 1.3 Cash flow from operations 1,487.0 1,023.4 1,740.4 1,229.7 Dividend yield (%) 0.5 0.6 0.7 0.7

Capital expenditures (1,271.4) (784.3) (832.7) (866.3) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 64.4 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 Cash flow from investments (1,207.0) (784.3) (832.7) (866.3)

Dividends paid (common & pref) (148.5) (92.8) (113.7) (125.8) Inc/(dec) in debt 159.6 0.0 (1,000.0) 0.0 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows (298.4) 0.0 0.0 0.0 Cash flow from financing (287.4) (92.8) (1,113.7) (125.8) Total cash flow (7.4) 146.2 (206.1) 237.6 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research 25 May 14, 2013 China: Metals & Mining: Base Metals

Overseas expansion, mining results display strong execution skills

The acquisition of Perilya was Lingnan’s first overseas venture. In 2009, Lingnan invested A$45.46 mn (Rmb200 mn) to acquire 50.1% of the listed Australian mining firm Perilya. At the time of acquisition, Perilya had 3.5 mn tons of zinc and lead reserves and 617 tons of silver. The company raised A$55.2 mn in a rights offering to expand its development of non-ferrous metals and in 2009 helped Perilya to shift from loss-making into profitability. Since the acquisition on February 9, 2009, to the end of 2009, Lingnan had realized profits of A$31.08 mn. Lingnan further expanded Perilya’s reserves through additional exploration to 4.47 mn tons of zinc and 1,979 tons of silver as of June 2012.

Further, in 2009 Lingnan successfully signed a cooperative exploration agreement with the Canadian firm Teck for the Ballinalack site in Ireland—Lingnan took 40% stake in Teck for US$6 mn. Exploration at the Ballinalack site already has found 560k tons of zinc and lead resources.

Exhibit 50: The acquisition of Perilya clearly increased resource reserves, as of 2012

Ore Grade Resources Zinc & Lead mines Equity (%) Kt Zinc (%) Lead (%) Silver (g/ t) Copper (%) Zinc (kt) Lead (kt) Silver (t) Copper (kt) Broken hill southern 53% 12,700 8.9% 6.8% 67 1,130 864 851 Broken hill Potosi 53% 1,610 14.0% 3.0% 46 225 48 74 Broken hill Silver Peak 53% 400 5.0% 9.0% 77 20 36 31 Broken hill North Mine 53% 1,000 7.0% 9.0% 140 70 90 140 Broken hill North Deeps 53% 3,300 11.5% 13.8% 224 380 455 739 Flinders-Beltana 53% 972 29.8% 290 Flinders-Adelaide 53% 316 32.0% 101 North Moolooloo 53% 2,140 34.4% 1.4% 735 29 Mount Oxide 53% 15,977 9 1.4% 144 228 Perilya total 38,415 2,951 1,522 1,979 228 Perilya total excluding minorities 20,502 1,575 812 1,056 122

Source: Company data, Gao Hua Securities Research.

The acquisition of GlobeStar created a platform for an international, diversified metal company. In December 2010, Lingnan acquired 97.77% of the Canadian firm GlobeStar using C$1.65 per share cash offer through Perilya. GlobeStar fully controls the resources at Cerro de Maimon (123k tons of copper, 208 tons of silver and 6.8 tons of gold); Cumpie Hill (93k tons of nickel); and Moblan (201k tons of lithium). The move not only boosted Lingnan’s zinc and lead reserves, but also gave it exposure to copper, gold, nickel, and lithium among other metal resources that we think would help stabilize the company’s earnings when zinc and lead prices are weak.

Exhibit 51: The acquisition of GlobeStar created a diversified metals platform (as of 2012)

Ore Resources Mines Equity (%) Kt Copper (kt) Silver (t) Gold (t) Nickel (kt) Lithium (kt) Cerro de Maimon Oxide Ore 53% 1,157 39.9 2.2 Cerro de Maimon Sulphide Ore 53% 4,825 122.5 168.4 4.6 Cumpie Hill 53% 6,200 93.0 Moblan 32% 14,250 200.9 GlobeStar total 26,432 122.5 208.3 6.8 93.0 200.9 GlobeStar total excluding minorities 11,065 65.4 111.2 3.6 49.6 64.3

Source: Company data, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 26 May 14, 2013 China: Metals & Mining: Base Metals

Results of overseas mining operations display Lingnan’s strong execution skills. After making Perilya profitable, Lingnan also got good results in their first year of operations at GlobeStar. In 2011, Cerro de Maimon mine saw copper production increase 20%, gold production grow 5%, and silver production jump 72.7%. Cash costs for copper concentrate also fell from US$0.80/pound to US$0.40/pound. Further, GlobeStar also significantly increased its resource reserves through exploration. We estimate that in 2013E-2014E, Perilya and GlobeStar will account for about 30% of Lingnan’s earnings, becoming a stable income source. Compared with the constant delays facing other domestic mining firms’ overseas projects, Lingnan’s overseas operational results display its strong execution skills. Stable development in 2013/2014

The return to normal production of Fankou mine and the expansion of Panlong mine should help Lingnan grow zinc and lead production by 16% in 2013E.

The return of Fankou mine to normal production in 2013 should increase zinc and lead ore concentrate production by 15k tons, in our view. Lingnan’s key domestic mines include Fankou and Panlong, both zinc and lead mines. Fankou mine has 4.1 mn tons of zinc and lead reserves and produces about 180k tons of those metals annually (as of 2011). Thanks to high quality ores (zinc grade 8.9%, lead grade 5.1%), 2012 costs per ton were only Rmb4,861.5, a clear cost advantage over most domestic zinc and lead mines and allowing Fankou mine’s 2012 gross margins to reach 61%. In 2012, after the lead poisoning incident, Fankou mine stopped production for 1 month. We believe a return to normal operations in 2013 should increase zinc and lead ore concentrate production by 15k tons.

In 2013, Panlong mine will expand production to 26k tons. Lingnan’s other domestic mine—Panlong—has current zinc and lead reserves of 1.28 mn tons. Beginning in late 2011, Lingnan has increased its equity stake in Panlong mine from 55% to 75%, initiating a round of expansion and upgrades. Lingnan expects to finish the upgrades in 2013 and we expect daily ore capacity to increase to 3,000 tons from 1,500 tons at present and annual zinc and lead production to increase to 26k tons from 12k tons at present .

Exhibit 52: Lingnan’s key domestic resources, as of 2012

Ore Grade Resources Zinc & Lead mines Equity (%) Kt Zinc (%) Lead (%) Silver (g/t) Zinc (kt) Lead (kt) Silver (t) Fankou mine 100% 29,338 8.9% 5.1% 89.4 2,608 1,496 2,623 Panlong mine 75% 35,273 2.7% 0.9% 959 321 Domestic total 64,611 3,568 1,817 2,623 Domestic total excluding minorities 55,792 3,328 1,737 2,623

Source: Company data, Gao Hua Securities Research

Launch of Broken Hill’s Potosi and Silver Peak projects provide overseas growth in 2013

Lingnan began construction on Potosi and Silver Peak of Broken Hill in February 2011. The projects entered service in late March 2013 with an annual capacity of 1.6mt. Average zinc grade is 8.3%, lead grade is 3.1% and silver content is 38 grams per ton. We estimate the projects will contribute 17k tons of zinc and lead ore concentrate in 2013E and 35k tons in 2014E, becoming Lingnan’s key overseas growth drivers.

The company also has nickel reserves at Cumpie Hill and lithium at Moblan. Once developed, these resources will help Lingnan diversify, hedging against the risk of zinc and lead prices weakening, in our view.

Goldman Sachs Global Investment Research 27 May 14, 2013 China: Metals & Mining: Base Metals

Environmental accidents a drag on expansion

Environmental accidents impacted operations. In October 2010, excessive amounts of thallium were discovered in an upstream segment of Bei River in Shaoguan city. The Ministry of Environmental Protection found the Shaoguan refinery’s waste water to be the source of the pollution and, starting October 21, 2010, the refinery ceased all operations. On July 20, 2011, Lingnan received approval from SASAC (State-owned Assets Supervision and Administration Commission of Guangdong province) for transitional operation of the refining system, but the #2 crude smelting system did not receive approval for transitional operation until September 2012. The #1 crude smelting system has been required to be completely closed and reorganizing the Shaoguan refinery has involved relocation and upgrades at other sites. Refining of zinc and lead metals at Shaoguan refinery fell from 256.2k tons in 2010 to 32k tons in 2011.

In March 2012, the company’s Danxia refinery and Fankou zinc and lead mine were also closed for inspections following lead poisoning incidents. Fankou mine was closed for 1 month while Danxia refinery stopped work for about 3 months. We believe the stoppages reduced 2012 refined zinc and lead metal output by about 50k tons.

Exhibit 53: Lingnan’s smelting production declined significantly after environmental accidents ‘000 tonnes

400.0 363.8 350.0 Smelting production for Lingnan 300.0 250.0 250.0

200.0 143.9 150.0 132.4

100.0

50.0

- 2010 2011 2012 2013E

Source: Company data, Gao Hua Securities Research estimates

Environmental accidents also delayed progress on expansion. Before the accidents, Lingnan had successfully acquired Perilya and GlobeStar. The overseas acquisitions drove rapid development. But the two accidents forced Lingnan to focus more on environmental safety in mining regions and refineries, especially at the relocation and upgrades to new sites for the Shaoguan refinery, which is an area of focus for the company in 2013-2014. We think as a result of this, the pace of expansion will slow somewhat.

The accidents have also caused Lingnan’s stock price to slide from outperforming to underperforming the sector. In October 2010, in the six months preceding the Shaoguan refinery accident, Lingnan’s stock price rose 48% while the zinc and lead industry as a whole rose 45% and Chihong’s stock price rose 25.6%. But from the Shaoguan accident until the lead poisoning on March 5, 2012, Lingnan’s stock price fell 39.3% while the sector declined 34% and Chihong’s stock price fell 17.3%. In the six months

Goldman Sachs Global Investment Research 28 May 14, 2013 China: Metals & Mining: Base Metals

following the lead poisoning incident, Lingnan’s stock fell an additional 28.4% while the sector fell 27.6% and Chihong declined 24%.

Exhibit 54: Accidents have caused Lingnan’s stock price to slide from outperforming to underperforming the sector

35 10000 Lingnan Chihong Sector index

9000 30 8000

25 Lingnan underperformed 7000 after lead poisoning incidents 6000 20 5000 15 4000

10 3000

2000 Lingnan outperformed 5 before the environmental Lingnan's stock was down 39.3% accidents of Shaoguan between two environmental accidents, 1000 refinery. while the sector index was down 34%, and Chihong down 17% 0 0 12/09 06/10 12/10 06/11 12/11 06/12 12/12

Source: Bloomberg、Gao Hua Securities Research.

Valuation: 12-m TP of Rmb8.6; Neutral

CROCI should be stable in 2013-2014. Lingnan’s CROCI in 2012 was 10.1% and we expect it to rise to 11.6% in 2013E and 11.4% in 2014E on return to normal operations following the accidents and gradual earnings growth. Lingnan outperforms Chihong in terms of CROCI and should remain in the industry’s second quartile.

Exhibit 55: Lingnan’s CROCI is a notch above that of Chihong

Ticker Company 2010 2011 2012E 2013E 2014E 2010-2012 2013-2014 000060.SZ Lingnan 10.4% 21.0% 10.1% 11.6% 11.4% 13.8% 11.5% 600497.SS Chihong 13.9% 12.6% 10.5% 9.3% 9.1% 12.3% 9.2%

Source: DataStream, Gao Hua Securities Research estimates.

EV/GCI vs. CROCI/WACC discount relative to the industry is likely to disappear, we assign a Neutral rating. From 2009-2012, Lingnan’s EV/GCI vs. CROCI/WACC was at 4% discount relative to the industry, which widened to 5% in 2013. We believe the accidents in 2010 and 2012 interrupted normal production, causing the discount to expand. However, now that normal operations have been resumed since late 2012, we think the discount is likely to disappear. Our 12-month Director’s Cut target price of Rmb8.6 implies 4% potential downside.

Goldman Sachs Global Investment Research 29 May 14, 2013 China: Metals & Mining: Base Metals

Exhibit 56: Lingnan historical P/E band Exhibit 57: Lingnan historical P/B band

PE Ave.PE +1Stdev ‐1Stdev PB Ave.PB +1Stdev ‐1Stdev 120 16 14 100 12 80 10 60 8 6 40 4 20 2

0 0 May‐07 May‐08 May‐09 May‐10 May‐11 May‐12 May‐13 May‐07 May‐08 May‐09 May‐10 May‐11 May‐12 May‐13

Source: Bloomberg, Gao Hua Securities Research. Source: Bloomberg, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 30 May 14, 2013 China: Metals & Mining: Base Metals

Disclosure Appendix

Reg AC

We, Jefferson Zhang and Yong Han, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

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Disclosures

Coverage group(s) of stocks by primary analyst(s)

Jefferson Zhang: Asia Commodities Companies, Asia Energy. Yong Han, CFA: Asia Commodities Companies, Asia Energy. Asia Commodities Companies: ACC, Aluminum Corporation of China (A), Aluminum Corporation of China (H), Ambuja Cements, Angang Steel (A), Angang Steel (H), Anhui Conch Cement (A), Anhui Conch Cement (H), Asia Cement, Asia Cement China Holdings, BBMG Corporation (A), BBMG Corporation (H), Banpu Public Company, Baoshan Iron & Steel, Borneo Lumbung Energi and Metal Tbk PT, Bumi Resources, China Coal Energy (A), China Coal Energy (H), China Molybdenum Co., China National Building Material, China Resources Cement Holdings, China Shanshui Cement Group, China Shenhua Energy (A), China Shenhua Energy (H), China Steel (GDR), China Steel Corporation, Coal India Ltd., Grasim Industries, Harum Energy Tbk PT, Hidili Industry International Development, India Cements, Jiangxi Copper (A), Jiangxi Copper (H), Korea Zinc, Maanshan Iron & Steel (A), Maanshan Iron & Steel (H), Mongolian Mining Corp., PT Adaro Energy Tbk, PT Indo Tambangraya Megah, PT Tambang Batubara Bukit Asam, Shandong Gold Mining Co, Shenzhen Zhongjin Lingnan Nonfemet, Shougang Fushan Resources Group, Shree Cement Ltd, TCC International Holdings, Taiwan Cement, Tongling Nonferrous Metals Group Co., Ultratech Cement, Yanzhou Coal Mining (A), Yanzhou Coal Mining (H), Yunnan Chihong Zinc & Germanium, Yunnan Copper Co., Zhaojin Mining Industry, Zhongjin Gold, Zijin Mining (A), Zijin Mining (H). Asia Energy: Beijing Haohua Energy Resource, Datong Coal Industry, Guizhou Panjiang Refined Coal, Henan Shen Huo Coal Industry & Electricity Power Co., Huolinhe Opencut Coal, Inner Mongolia Yitai Coal Co Ltd, Jizhong Energy Resources, Kailuan Energy Chemical, Pingdingshan Tianan Coal Mining, Pingzhuang Energy Resources, SDIC Xinji Energy Co., Shanxi Coal International Energy Group Co., Shanxi Lanhua Sci-Tech Venture, Shanxi Lu'an Environmental Energy Development, Shanxi Xishan Coal and Electricity Power, Yangquan Coal Industry Group, Yitai Coal, Yuanxing Energy.

Goldman Sachs Global Investment Research 31 May 14, 2013 China: Metals & Mining: Base Metals

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Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 54% 15% 49% 42% 36% As of April 1, 2013, Goldman Sachs Global Investment Research had investment ratings on 3,492 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)

Shenzhen Zhongjin Lingnan Nonfemet (000060.SZ) Stock Price Currency : Chinese Renminbi Yunnan Chihong Zinc & Germanium (600497.SS) Stock Price Currency : Chinese Renminbi Goldman Sachs rating and stock price target history Goldman Sachs rating and stock price target history 1,600 30 19.00 3,400 17.00 1,400 25 3,200 15.00 3,000 12.2 1,200 20 16.79 13.00 11.2 13.83 2,800 11.00 1,000 15 2,600 9.00 2,400 800 10 7.56 7.00 8.85 14.02 2,200 5.00 600 5 2,000

e Mar 2 Mar 15 Sep 24 e e Mar 2 Mar 15 Sep 24 e N NA B CS S NA N CS M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M 2010 2011 2012 2013 2010 2011 2012 2013 Index Pric Index Pric Stock Pric Stock Pric Stock Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2013. Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 3/31/2013. Rating Covered by current analyst Rating Covered by current analyst Price target Price target Price target at removal Not covered by current analyst Price target at removal Not covered by current analyst Shenzhen A Index Shanghai SE A Share Index

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets. may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

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Goldman Sachs Global Investment Research 32 May 14, 2013 China: Metals & Mining: Base Metals

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Goldman Sachs Global Investment Research 33 May 14, 2013 China: Metals & Mining: Base Metals

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Goldman Sachs Global Investment Research 34