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See more information at www.novasbe.pt Page 1/30

MASTERS IN FINANCE

E

QUITY

R

ESEARCH

40 50 60 70 80 90 100 110

ArcelorMittal STOXX Europe 600  We initiate coverage on ArcelorMittal with a target price of $31.42,

a 110% premium on its current price of $14.95

 Steel margins estimated to rebound throughout the decade, albeit still distant from pre-crisis levels

 Combination of higher volumes and increasing focus on market-priced shipments will allow continuing good results by the mining division, even with the forecasted fall in iron ore and met coal prices  Management efforts to keep investment grade status by divesting non-core assets (Erdemir, Enovos, Skyline Steel) will strengthen Balance Sheet and debt position

 Europe’s weight on sales is expected to decrease gradually, contributing to a more diversified company less dependent on the continent’s fortunes.

Company description

ArcelorMittal is the world's leading integrated steel and mining company, with a presence in more than 60 countries. In 2011, ArcelorMittal employed 220.000 employees with revenues of $94 billion and crude steel production of 92 million tonnes, 6% of the world steel output.

It is also the 5th largest producer of iron ore, with a global portfolio of 16 operating units in operation or development.

A

RCELOR

M

ITTAL

C

OMPANY

R

EPORT

M

ETALS

&

M

INING

E

UROPE

JUNE 4TH 2012

S

TUDENT

:

I

VO

F

ERNANDES

mst16000316@novasbe.pt

Poised for a comeback

Gradual improvement of market conditions and

mining expansion support growth

Recommendation BUY

Price target FY12 $ 31.42

Price (29/05/12) $14.95

Upside 110.17%

Reuters ISPA.AS

Bloomberg MT NA

Shares outstanding (m) 1.560.914

Market cap ($ bn) 23.3

52-week range ($) 13.96-35.31

Performance 1w 1m 3m 12m

ArcelorMittal 7% -9% -17% -48% DJ STOXX 600 2.2% -2% -9% -9%

(In $billion)

2010 2011 2012E 2013E 2014E

Revenue

Revenue 78.025 93.973 94.978 99.002 102.153

EBITDA 8.525 10.117 11.141 12.387 12.851

Net income 2.917 2.262 2.701 3.414 3.552

Total debt 26.008 26.418 25.432 26.478 28.521

D/E 0.30 0.37 0.34 0.35 0.37

ROA 2.23% 1.86% 2.12% 2.58% 2.60%

ROE 4.41% 3.74% 4.33% 5.27% 5.37%

ROIC 4.33% 5.70% 6.15% 6.94% 7.02%

(2)

ARCELORMITTAL COMPANY REPORT

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PAGE 2/30

Table of Contents

VALUATION ... 3

DISCOUNTED CASH FLOW ... 3

MARKET MULTIPLES ... 5

COMPANY INFORMATION ... 6

OVERVIEW... 6

COMPANY STRUCTURE ... 7

Flat Carbon Americas ... 7

Flat Carbon Europe ... 7

Long Carbon Europe and Americas ... 7

AACIS ... 8

AMDS ... 9

Mining ... 9

SHAREHOLDER STRUCTURE ... 10

STEEL ...11

INDUSTRY OVERVIEW ... 11

Regional dynamics ... 12

China ... 14

Long-term prospects ... 16

VALUATION ... 18

Flat Carbon Americas ... 19

Flat Carbon Europe ... 19

Long Carbon Europe and Americas ... 20

AACIS ... 20

AMDS ... 21

MINING ...22

INDUSTRY OVERVIEW ... 22

VALUATION ... 24

FINANCIALS ...26

APPENDIX ...27

IRON ORE CONSUMPTION AND SEABORNE DEMAND ... 27

FINANCIAL STATEMENTS ... 28

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Valuation

Discounted Cash Flow

ArcelorMittal’s value was assessed by using the Discounted Cash Flow (DCF) methodology. In order to properly reflect the cyclicality of the steel industry, three scenarios were constructed; this allows for more accurate value estimation as well as putting boundaries – both upper and lower – to the valuation. These scenarios broadly reflect the Global Economic Outlook’s views on GDP growth until 20251. Steel demand, prices and operating margins were based on these forecasts and duly differ in each scenario. All cash flows are estimated in real terms in United States dollars ($), with an explicit forecast period covering the10 years until 2021.

From 2021 onwards a real constant cash flow growth rate of 0% is assumed, reflecting our view of the long-term prospects of the industry.

ArcelorMittal’s cost of capital was computed based on the WACC approach. The cost of debt was computed by analysing market yields on issued bonds and its credit rating and recovery rates2. ArcelorMittal’s recently-issued 1.1 $ billion ten-year bond yielded 6.21%.

Despite its BBB- rating, we believe management’s efforts to keep the investment grade status by divesting non-core assets ensure a solid company. Thus, we estimate a low default probability (1%). The recovery rate in the event that the company fails to meets its debt payments was estimated to be 70.03%3. Lastly, in order to calculate the after-tax cost of debt we multiplied by 1-t, with t being the effective tax rate for Luxembourg (28.8%), yielding a real (i.e., considering inflation of 2%) after-tax cost of debt of 2.16%.

The cost of equity was calculated by using the CAPM4 method. As the cash flows are reported in US dollars, the risk-free rate was extracted by the yield on 10-year zero-coupon US STRIPS (1.87%). To reflect relevant research5 on the matter, a market premium of 5.5 was deemed appropriate.

1For full description of the forecasts consult the annex

2

( ) 3

Corporate Default and Recovery Rates, 1920-2008. (2009). Moody’s Investors Service.

4

Capital Asset Pricing Model. The required rate of return is given by: ( ) ( )

5Fernandez, P. Aguirreamalloa, J., Avendaño, L. C. (2011).”

US Market Risk Premium used in 2011 by Professors,

Analysts and Companies: A survey with 5.731 answers”. IESE Research Papers D/912, IESE Business School

After-tax real cost of debt of 2.16%

Unlevered Beta of 1.22

Cost of equity of 6.56% 3 scenarios for the evolution of ArcelorMittal and the overall economy

Terminal growth rate of 0%

Implicit inflation rate of 2%

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PAGE 4/30 The levered beta was estimated by computing weekly returns for five years against the benchmark STOXX Europe 600. This figure was then unlevered to ArcelorMittal’s target capital structure, yielding an unlevered beta of 1.22. The corresponding real cost of equity for ArcelorMittal was 5.42%.

We then subtracted all non-equity claims (interest-bearing debt, underfunded post-retirement benefits, operating leases and minorities) to enterprise value to obtain the equity value of ArcelorMittal.

Between the three scenarios, ArcelorMittal’s share price varied between $25.9 and $54.26. The weighted-average share price was $31.4, more than double its current price of $14.95. We believe the market is undervaluing the company, so we strongly recommend buying ArcelorMittal stock.

Table 1 – Sensitivity table for terminal growth rate and WACC

Terminal growth

WACC

3.42%

4.42%

5.42%

6.42%

7.42%

-2% 31.79 23.82 17.85 13.20 9.45

-1.50% 36.81 27.37 20.51 15.26 11.10

-1% 42.96 31.58 23.58 17.61 12.95

-0.50% 50.69 36.65 27.17 20.29 15,03

0.00% 60.67 42.86 31.42 23.39 17.40

0.50% 74.07 50.66 36.54 27.01 20.11

1% 93.00 60.74 42.81 31.30 23.23

1.50% 121.80 74.26 50.68 36.46 26.89

2% 170.88 93.38 60.85 42.80 31.22

Source: Analyst estimates

ArcelorMittal BBB- 6.21%

Nippon Steel (JAP) BBB+ 0.96%

POSCO (KOR) A- 5.42%

US Steel (USA) BB 7.52%

Nucor (USA) A 2.86%

BHP Billiton (AUS) A+ 3.49% Table 1 – Credit ratings and market yields on debt

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Market Multiples

Market multiples are useful to triangulate results obtained by a DCF valuation. The following table summarizes key comparable metrics for ArcelorMittal and its peers, both in the steel and mining industry.

Table 2 – Comparable metrics for the steel and mining industries

Market Cap ($billion)

Revenue ($billion)

Beta (Levered)

EBITDA margin D/E

EV/next year EBITDA

P/E P/B ROA ROE ROIC

ArcelorMittal 22.18 93.97 1.52 9.88% 0.38 4.26 18.35 0.5 1.79% 3.80% 4.35%

BHP Billiton 156.83 71.74 1.2 52.64% 33.2 4.58 10.93 4.38 24.67% 44.92% 34.97%

Vale 96.74 61.81 1.2 55.80% 25.75 3.98 5.47 1.4 16.57% 29.58% 23.17%

Rio Tinto 86.08 60.54 1.27 43.45% 19.91 3.58 20.37 2.21 5.02% 10.52% 13.27%

POSCO 26.7 62.29 1.2 11.20% 0.5 4.98 7.8 0.77 4.99% 9.96% 6.70%

Nippon Steel 15.18 51.85 0.94 9.24% 0.54 5.91 20.02 0.78 1.18% 3.17% 1.21%

China Steel 14.22 13.64 NA 12.64% 0.62 8.03 32.33 1.47 3.37% 7.02% 4.34%

Gerdau 13.18 21.21 1.38 12.41% 0.37 5.86 13.41 0.99 4.32% 9.02% 6.65%

Severstal 11.73 15.81 1.05 22.68% 0.58 4.4 6.23 1.71 10.91% 29.67% 17.45%

Nucor 11.61 20.02 0.94 9.78% 0.25 4.94 14.37 0.78 5.46% 10.66% 8.44%

JFE 10 40.13 0.84 NA 1.05 6.13 NA 0.68 -0.92% -2.57% 3.86%

Tata Steel 7.07 26.07 1.1 10.14% 1.27 NA 4.11 1.68 7.33% 30.76% 8.03%

Hebei 5.04 20.6 NA NA 1.32 4.51 17.64 0.71 1.00% 3.28% 2.95%

US Steel 3.23 19.88 1.28 5.54% 1.01 3.69 15.59 1.09 -0.34% -1.44% 0.71%

High 26.7 62.29 1.38 22.7% 1.32 8.03 32.33 1.71 10.9% 30.8% 17.5%

Mean (steel) 11.80 29.15 1.09 11.7% 0.75 5.38 14.61 1.07 3.7% 10.0% 6.0%

Low 3.23 13.64 0.84 5.5% 0.25 3.69 4.11 0.68 -0.9% -2.6% 0.7%

Source: Bloomberg

By analysing the table, we can see that ArcelorMittal’s gearing is low by industry standards, which helps to explain its low return on equity. Whilst ArcelorMittal’s performance is below-par in some ratios (return on assets, return on capital), others indicators (price/book, price/sales, EV to next year EBITDA) indicate that the market believes ArcelorMittal lags its peers. However, this difference alone does not justify the huge discount that ArcelorMittal commands relative to our assessment of its fair value.

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91 45 35 34 31 30 27 25 23 23 20 20 15

0 50 100

ArcelorMittal (LUX) Hebei (CHI) Nippon Steel (JAP) POSCO (KOR) JFE (JAP) Ansteel (CHI) Baosteel (CHI) US Steel (USA) J. Shagang (CHI) Tata Steel (IND) Gerdau (BRZ) Nucor (USA) Severstal (RUS)

95,9 116,6 60,9

78 94

18,6 23,6 5,6

8,5 10,1

0 50 100

2007 2008 2009 2010 2011

EBITDA Sales Source: World Steel Association

Figure 2 – ArcelorMittal KPI ($ billion)

Source: ArcelorMittal

Company information

Overview

ArcelorMittal is the result of a series of mergers and acquisitions partaken by Lakshmi Mittal. ISPAT International, its predecessor, first ventured internationally in 1989 with the acquisition of Iron & Steel Company of Trinidad & Tobago. By pursuing an aggressive and disciplined consolidation strategy, ISPAT acquired several distressed steelmakers throughout the world and returned them to profitability by applying modern management principles and employing a core team of experts to implement cost-saving measures, marketing changes and market reorientation. In 2004 ISPAT International merged with Mittal’s LNM Holdings, which controlled Mr Mittal’s developing world facilities, to form the largest steel company in the world, Mittal Steel.

Arcelor was also a result of a series of M&A, culminating in the 2002 combination of Spain’s Aceralia Corporación Siderúrgica, Luxembourg’s Arbed and France’s Usinor.

ArcelorMittal was created with the high-profile $33 billion acquisition of the then world number two steel producer Arcelor by Mittal Steel in 2006, which generated the first ever 100 million tonne per year producer and the undisputed global leader in the steel industry.

In 2011, ArcelorMittal produced over 92 million tonnes of crude steel, which accounted for 6% of the world’s total production. It is the largest steel producer in Europe, the Americas, Africa and the 4th largest in the former Soviet Union (CIS). Additionally, the group is increasing its presence in key raw materials industries, namely iron ore and coal. The group is already the 5th largest iron ore producer by volume and has outlined an ambitious goal for 2015 – 100m tonnes including strategic contracts.

Reflecting the cyclicality of the steel industry, the past few years have been quite volatile for ArcelorMittal. Buoyed by the economic boom in the developed world - which accounts for the majority its steel shipments - and in steel prices, it recorded bumper profits in 2007 and 2008. However, prospects were quickly hit by the 2008 financial crisis. With developed world’s economies slipping to recession, steel demand (and prices) plunged. The gloom persists, compounded by the sovereign debt crisis that still hovers over Europe.

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26%

32% 26%

16%

FCA FCE LC AACIS

Source: ArcelorMittal

21%

15%

19% 12%

3% 30%

FCA FCE LC

AACIS AMDS Mining

Source: ArcelorMittal

Figure 4 – EBITDA by segment, 2011

Company structure

Following the spin-off of the stainless steel division in to a separate company, Aperam, in January 2011, ArcelorMittal currently reports in the following six segments:

Flat Carbon Americas

Flat Carbon Americas (FCA) produces slabs hot-rolled coil, cold-rolled coil, coated steel and plate. Production facilities are located at eight integrated and mini-mills sites the United States, Canada, Mexico and Brazil, with an aggregate liquid steel capacity of 37.7 million tonnes.

Shipments in 2011 were 22.2 million tonnes, primarily to clients in the construction, automotive, packaging, appliances, packaging, pipes and tubes and distribution and processing industries.

Flat Carbon Europe

Flat Carbon Europe (FCE) is the largest flat producer in Europe, producing hot-rolled coil, cold-hot-rolled coil, coated products, tinplate, plate and slab. Facilities are located at in eleven countries (Spain, France, Italy, Belgium, Luxembourg, Germany, Poland, Czech Republic, Macedonia, Estonia and Romania), with a combined liquid steel capacity of 49.4 million tonnes.

In 2011 shipments equalled 27.1 million tonnes, mainly to the automotive, packaging and general industries.

Long Carbon Europe and Americas

Long Carbon Europe and Americas (LC) produces sections, wire rod, rebars, billets, blooms, wire drawing, pipes and tubes, sheet piles, rails, ingots, speciality bars and slopes. In Long Carbon Americas production facilities are located at 14 integrated and mini-mill sites located in six countries, while in Long Carbon Europe production facilities are located at 17 integrated and mini-mill sites in nine countries, for a total liquid steel capacity of 36.7 million tonnes.

In 2011 shipments totalled 23.8 million tonnes. Figure 3 – Crude steel production

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12%

24%

21% 22%

6% 14%

1%

FCA FCE LC AACIS

AMDS Mining Other

Figure 5 – Employees by division, 2011

Source: ArcelorMittal

10,03%

4,83% 7,42%

15,34%

1,42% 48,87%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Figure 6 – EBITDA margin by division, 2011

Source: ArcelorMittal

AACIS

The AACIS division – Asia, Africa and Commonwealth of Independent States - is composed of three subsidiaries: ArcelorMittal South Africa, ArcelorMittal Temirtau (Kazakhstan) and ArcelorMittal Kryviy Rih (Ukraine).

ArcelorMittal South Africa (AMSA), which operates the Vanderbijlpark, Saldanha, Vereenigin and Newcastle facilities, is the biggest steel producer in Africa, with an annual crude steel capacity of 8 million tonnes. Vanderbijlpark and Saldanha specialize in the production of flat products such as hot and cold rolled, colour coated, electro galvanised, hot dipped galvanised, plate, tin plate and slabs. Newcastle and Vereenigin produce long products: wire rod, bars, sections, rebar, seamless tubes and others. Additionally, the company commercializes coal and steelmaking by-products through its Coke & Chemicals division. It exports about 30% of its production, most of it to African countries.

ArcelorMittal Temirtau is one of the largest single-site integrated steel plants in the world, with a steelmaking capacity of 5.5 million tonnes per year. It has its own coal, iron ore and energy base. It produces hot and cold rolled steel, tin plate, galvanized steel, coated coils, bars, coke, chemical by-products and welded pipes (operated by ArcelorMittal Aktau). Over 95% of production is exported.

ArcelorMittal Kryviy Rih is the largest integrated steel manufacturer in Ukraine, with captive iron ore reserves. Acquired by Mittal Steel in 2005 - in the largest privatization in the former Soviet Union - it has a capacity of 8.5 million tonnes of crude steel per year. It specializes in the production of long products, namely rebar, wire rods, bar, sections and L angle sections. Also produced are sinter, concentrate, coke, pig iron and blast furnace slag. In addition to supplying domestic demand, it exports to CIS, Western and Northern Africa, Middle East and the Balkans.

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PAGE 9/30 0

1000 2000 3000 4000 5000 6000

2010 2011 2012E2013E2014E2015E

Figure 7 –Mining division EBITDA, $billion

Source: ArcelorMittal, Analyst estimates

AMDS

ArcelorMittal Distribution Solutions (AMDS) is primarily an in-house trading and distribution arm of ArcelorMittal. It also provides value-added and customized steel solutions through further steel processing to meet specific customer requirements. It is the largest customer of Flat Carbon and Long Carbon divisions, serving a variety of industries such as automotive, construction, household appliances, public works, civil engineering and general industry. AMDS is further divided in five business units: ArcelorMittal Construction Solutions, ArcelorMittal International, ArcelorMittal Projects, ArcelorMittal Total Offer Processing, and ArcelorMittal Wire Solutions, with combined steel shipments in 2011 of 18.3 million tonnes.

Mining

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40,83%

0,77% 58,40%

2,50%

Mittal Family Treasury shares

Free float Luxembourg State

Source: ArcelorMittal, Bloomberg

Shareholder structure

ArcelorMittal’s shareholding structure is unique in the sense that its CEO and chairman, Lakshmi Mittal, holds a large portion of its shares. This condition originates from the merger of Arcelor and Mittal Steel in 2006; at the time, Mittal, though special voting mechanisms, controlled 98% of Mittal Steel’s voting rights. The merger diluted his influence, but he still controls 41% of voting rights in ArcelorMittal.

This concentration is a very unique situation in the industry, with the notable exception of Severstal, whose CEO Alexey Mordashov controls 82.37% of the company. Other steel companies are either controlled by a mix of institutional investors or, in the case of China, by the state itself.

This alignment of interest between the firm’s management and shareholders make it unlikely that ArcelorMittal dilutes its equity in the future. An example of this was ArcelorMittal’s acquisition in December 2010 of call options on its own shares in order to prevent a possible dilution with the conversion of the $2.5 billion convertible bonds issued in 2009. This dilution management program highlights the company’s unwillingness to dilute its equity; it would weaken Mr Mittal’s grip on the company and erode his personal wealth.

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PAGE 11/30 48%

20% 17% 15%

Construction Auto

Machinery Other

Source: Metals Consulting International

-10% -5% 0% 5% 10% 15% 20%

1981 1988 1995 2002 2009

Steel Production World GDP Figure 11 – World steel production in volume and world GDP in real terms, 1981-2010

80% 8%

6% 2% 1%

3%

38%

22% 13%

11% 8%

3% 2% 2%

Source: Analyst estimates Source: World Bank, World Steel

Association

Figure 10 - Breakdown of variable steelmaking costs by process

Steel

Industry Overview

As with any industry, the steel industry’s fortunes are heavily intertwined with its customers’ prospects. As the vast majority of steel is used in the production of capital and durable goods, steel demand is highly dependent on the prospects of manufacturers, auto makers and especially construction companies, which depend on the condition of the overall economy. As such, production and capacity utilization rates in the industry have historically reflected the economic sentiment.

The industry’s outlook is also heavily dependent on the evolution of its key commodities: iron ore, metallurgical coal and scrap. Depending on the production process - Blast Oxygen Furnace (BOF) or Electric Air Furnace (EAF) - , these inputs can represent 80-85% of all variable costs in producing a tonne of liquid steel if we include their transport costs under consideration6.

6Fixed costs include depreciation, interest and a proportion of labour and electricity costs

Figure 9 – Steel demand by end-use industry, 2010

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$0 $20 $40 $60

China Mexico Poland Brazil South Korea Japan US France Germany Belgium

Figure 12 – Hourly compensation costs in manufacturing, $ (2010)

Regional dynamics

All companies use the same processes in steelmaking, so the inputs and their proportion are roughly equal worldwide. Given their weight in steelmaking costs, access to iron ore and coke is the most relevant variable in steelmaking. Thus, steelmakers with captive supplies of raw materials will be able to produce at a lower cost than those less fortunate who have to acquire them in international markets. As the price of iron ore and increase, the larger and more significant this gap becomes.

Two other costs differ in different regions in the world: energy and labour. Whilst each represents just 2-3% of variable costs, in an industry producing non-differentiated standardized products final price is often the difference between producers. Both labour and energy prices vary widely throughout the world. Regarding labour costs, and unsurprisingly, developed economies face higher costs than less developed ones. The difference between the upper and lower tiers is significant, which constitutes a relative advantage in favour of producers located outside the rich world.

On the other hand, energy costs, albeit varying widely across regions, are not necessarily lower in developing countries. In fact, low-wage China has higher energy costs than its peers, which erases the former competitive advantage. Energy-rich regions such as Russia benefit the most from their low energy costs, especially in the more energy-intensive EAF route.

The competitiveness of each steel-producing region can be roughly assessed by analysing its steel trade figures. The three factors mentioned above – access to raw materials, labour and energy costs – intertwine to determine the most competitive producers (figure 13).

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CIS Japan China EU 27 Brazil USA South Korea India Africa

-20.000 0 20.000 40.000 60.000 Figure 13 – Net exports of semi-finished and finished steel products, 2010

Source: World Steel Association

0 20 40 60 80 100 120 140 160 180 0% 1% 2% 3% 4% 5% 6% 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

Tariffs Anti-Dumping duties

Figure 14 –Evolution of US steel imports’ tariffs and non-tariff measures

Source: UNCTAD Trains, Temporary Trade Barrier Database, World Bank

0 100 200 300 400 500 600 M a y-0 3 M a y-0 4 M a y-0 5 M a y-0 6 M a y-0 7 M a y-0 8 M a y-0 9 M a y-1 0

Baltic Dry Index Brent Figure 15 – Evolution of transport and oil prices (2003=100)

Source: Bloomberg

If some regions are more efficient in producing steel, why isn’t production relocated from high-cost producers? There are two reasons that explain this situation. The first is transportation costs. When oil prices were low, Chinese and Russian steel were more competitive than their American and European peers. The current level of oil prices and its likely evolution will make it much harder for exporting countries, as their competitive advantages are eroded by transportations costs.

The second and most pertinent factor is that the steel industry has never benefited from free trade across countries. Import and export tariffs have been constantly employed to protect national steel industries7. However, globalization has eroded the industry’s capacity to influence policymaking. Due to technological developments, employment in the industry has declined heavily in the last 30 years, hindering the bargaining power of national companies for protective tariffs.

In recent years, World Trade Organization (WTO) rules have made it more difficult to blatantly apply import tariffs, but countries have turned to technical barriers to deter imports8. These encompass regulations, standards, government procurement restrictions, subsidies, investment controls and others.

National steel markets are still, directly or indirectly, partially shielded from foreign competition, which obstructs the natural flow from high-cost producers to the most efficient ones.

7

Export Barriers and Global Trade in Raw Materials: The Steel Industry Experience. Report to the Raw Materials Committee of the OECD. Price, A. and Nance, S., October 2009

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PAGE 14/30

46%

12% 7%

7% 6%

5% 5%

2% Others

10%

2011

7%

68%

25% 93%

GFCF

Household consumption

Non-Residential

Residential

Sources: World Steel Dynamics, World Bank

15%

23%

12% 13%

12% 3%

5% 3%

Others 14%

2000

0% 10% 20% 30% 40% 50% 60%

China India OECD

Figure 17 - Breakdown of China’s apparent steel consumption, 2010 (left); Gross Capital formations as % of GDP (right)

China

Perhaps more than in any other industry, the past decade has seen the emergence of China as the biggest player in the market; it now accounts for about 45% of world steel production and its demand is the main determinant of commodities prices. Furthermore, China’s medium-term economic growth looks set to insure that its steel sector will increase its weigh in world production in the next years.

However, China’s apparent steel demand relies greatly on its GFCF spending9. Experts at the IMF and the World Bank agree that China’s rebalance towards domestic consumption is both desirable and inevitable, which will fundamentally alter the industry’s potential growth in the long-term.

9

Gross fixed capital formation: includes land improvements, plant, machinery and equipment purchases, construction of roads, railways, residential and commercial buildings among others

Figure 16 – Production of crude steel by country

(15)

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PAGE 15/30 Australia

Brazil

Canada China

EU 27

India

Japan

Russia

South Korea

Turkey USA

0 200 400 600 800 1.000 1.200 1.400

$0 $5.000 $10.000 $15.000 $20.000 $25.000 $30.000 $35.000 $40.000 $45.000 $50.000

A

p

p

ar

e

n

t

ste

e

l d

e

m

an

d

p

e

r

cap

ita

(K

g

)

GDP per capita, $ (PPP) Figure 18 – Apparent steel use per capita, 2010

Source: World Steel Association, World Bank

Furthermore, at 445 kg per capita, China’s steel intensity is already high by world standards. The Middle Kingdom already dwarfs the steel intensity of other middle-income countries such as Turkey, Brazil and Russia. We thus believe that its steel consumption growth rate will fall in the comings years, which will also have consequences in iron ore and coke prices.

Notwithstanding this pivotal role, the Chinese steel market is still highly fragmented and a wave of consolidation is set to occur in the coming years as part of the 12th Communist Party’s Five-Year Plan. With 1.500 steelmakers in operation, the Chinese state has outlined a restructure with the goal that the top 10 steelmakers account for 60% of production, up from 48% in 2010. China’s ruling party still regards the steel industry as a key player in its sovereignty, so foreign participation in Chinese steel mills is expected to continue to be limited to minority investments in the short to medium-term.

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PAGE 16/30

950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450

65% 70% 75% 80% 85% 90%

1970 1975 1980 1985 1990 1995 2000 2004

St

ee

l co

nt

ent

per

ve

hi

cl

e,

kg

Stee

l

con

ten

t

(%

o

f ca

r

wei

g

ht

)

Figure 18 – Evolution of steel content in average car

Source: US Geolology Survey Long-term prospects

In our view, the development of alternative materials to steel like aluminium, titanium and especially carbon-fibre will be a threat to future use of steel, limiting the industry’s prospects. In the auto industry, which accounts for a fifth of steel demand, average use of steel per vehicle has been declining for decades.

Additionally, the development of carbon-fibre reinforced polymers has been gathering pace; 60% lighter than steel, whilst maintaining the same structural and safety levels, carbon-fibres look poised to overthrow steel in the medium-term, when prices are competitive to those of steel.

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PAGE 17/30

65%

35%

2005

45%

55%

2020E

Developed markets

Emerging markets Figure 19 – Global construction output

Source: Global Construction 2020

Presently, carbon-fibre prices are about five times higher than those of steel, but significantly lower than ten years ago, when that ratio was 2-4 times that. We believe that it is very likely for this downward trend in prices to continue, at which point we are convinced that steel will be replaced at a large scale in the making of new automobiles.

We are more sanguine about the prospects of steel in its main customer, the construction industry. Steel’s unique combination of strength, weight, adaptability, low maintenance, low environmental impact and cost-effectiveness are currently unrivalled by any other material or composite.

Despite the fact that efforts to find an alternative construction material have taken place for years (engineered timber, composite plastics and other metals, to name a few) none have succeeded in replacing steel. Thus, we believe that in the short to medium term no alternative material will be commercially available; steel will remain paramount to the construction industry for the coming decades.

The outlook for the construction industry is bright, due to population growth and soaring economic growth by emergent markets. The construction market is expected to be worth $12 trillion, up from $7.5 trillion today10. These opportunities will surely in the short to medium term increase demand for steel.

Our real terminal growth rate of 0% thus reflects our view on the opposing outlooks for steel demand in different markets.

10

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PAGE 18/30 -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2007 2008 2009 2010 2011 Figure 20 – Evolution of EBITDA margin of steel operations

Source: Federal Reserve Economic Data, Eurostat

Figure 21 – US and Eurozone seasonally-adjusted Industrial Production Index (2008=100)

75 80 85 90 95 100 105 01-06 04-06 07-06 10-06 01-07 04-07 07-07 10-07 01-08 04-08 07-08 10-08 01-09 04-09 07-09 10-09 01-10 04-10 07-10 10-10 01-11 04-11 07-11 10-11 01-12

US Euro Area

Source: ArcelorMittal

Valuation

After the spectacular end to the boom years in 2009, ArcelorMittal’s steel operations have not yet fully recovered from the shock. 2010 and 2011 have seen slight improvements on the steel divisions’ profitability, but it remains far below pre-crisis levels.

In addition its sluggishness, the recovery has also been asymmetrical, with some divisions lagging behind others. Unsurprisingly, divisions exposed to Europe have suffered the most due to the continued slump in the euro-area, whilst Flat Carbon Americas and AACIS’s margins have thus far fared better.

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PAGE 19/30 0

5.000 10.000 15.000 20.000 25.000 30.000 35.000 40.000

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

S

h

ip

m

en

ts (000

'

to

n

n

es)

E

B

ITD

A

m

ar

g

in

EBITDA margin Shipments

0 5.000 10.000 15.000 20.000 25.000 30.000 35.000

0% 5% 10% 15% 20% 25%

S

h

ip

m

e

n

ts

(000'

to

n

n

e

s)

E

B

ITD

A

m

ar

g

in

EBITDA margin Shipments

Source: Analyst estimates Source: Analyst estimates

Flat Carbon Americas

The stronger recovery by the United States – by low rich world standards – will propel the division, which is forecasted to surpass pre-crisis shipments by the end of the decade. We estimate margins to gradually improve from current levels, but still far off 2007 and 2008 figures.

Flat Carbon Europe

With the sovereign debt situation in the Euro Area still unresolved, the Flat Carbon Europe will be the division most affected by the negative climate surrounding it. Although we forecast shipment volumes to grow moderately, margins should remain low throughout the decade.

Figure 22 –Flat Carbon America’s EBITDA margin and shipments estimates

(20)

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PAGE 20/30 0

5.000 10.000 15.000 20.000 25.000 30.000 35.000

0% 5% 10% 15% 20% 25%

S

h

ip

m

e

n

ts

(000'

to

n

n

e

s)

E

B

ITD

A

m

ar

g

in

EBITDA margin Shipments

35% 17%

16%

0% 10% 20% 30% 40%

2008 2015E 2021E

Source: ArcelorMittal, Analyst estimates Figure 24 – Long Carbon division’s contribution to Operating Income

Figure 25 –Long Carbon’s EBITDA and shipment estimates

Source: Analyst estimates

Long Carbon Europe and Americas

The major source of demand for long carbon steel products is the construction industry. We have mentioned before the bright prospects of the construction industry, buoyed by population and economic growth in emerging countries. Alas, ArcelorMittal’s Long Carbon division’s production facilities are concentrated in Western Europe, where prospects are not as sunny. Therefore, we believe Long Carbon Europe and Americas will not regain its place as a growth engine for the company unless its geographical distribution is greatly altered, which given the huge political and social costs of relocating production is highly unlikely.

AACIS

(21)

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PAGE 21/30 0

5.000 10.000 15.000 20.000 25.000

0% 5% 10% 15% 20% 25% 30% 35%

S

h

ip

m

en

ts (000

'

to

n

n

es)

E

B

ITD

A

m

ar

g

in

EBITDA margin Shipments

0 5.000 10.000 15.000 20.000 25.000

-1% 0% 1% 2% 3% 4% 5% 6%

S

h

ip

m

en

ts (000

'

to

n

n

es)

E

B

ITD

A

m

ar

g

in

EBITDA margin Shipments

Source: Analyst estimates

The division’s importance may increase exponentially if the projected 6 million tonnes integrated steel facility in India is completed. The project has been plagued by delays in obtaining land permits by local governments in the India States of Jharkhand and Orissa since 2005. Other steel makers such as POSCO have also been affected by such delays, which indicate that such investments may take a long time – if ever- to be up and running.

AMDS

The Distribution Solutions division is heavily exposed to Europe and as such we are not optimistic that the division will overcome its recent poor results soon. Margins should only recover in the latter half of the decade, when economic sentiment is in a better condition.

Figure 27 – ArcelorMittal Distribution Solutions EBITDA and shipments estimates

Source: Analyst estimates

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PAGE 22/30 374

192

149

55 54 46

0 50 100 150 200 250 300 350 400

Figure 29 – Iron ore production in 2011, million tonnes

1200 480

390 240 100 80 55 54

201

China Australia Brazil India Russia Ukraine S. Africa USA Others

Figure 28 – Iron ore production, 2011 (in million tonnes of usable ore)

Source: US Geological Survey 2012

Source: Analyst estimates

Mining

Industry Overview

Iron ore and metallurgical coal (coke) are key raw materials in the production of steel and so their prospects are linked to those of the steel industry. In the past decade, with the staggering evolution of the steel industry in China, what had been two unglamorous commodity markets have been given a pivotal role in seaborne shipments, especially iron ore, as it is now the largest commodity market by tonnage and value after oil11.

As reserves are not evenly distributed in the world, a few countries dominate iron ore production. Three companies - Brazil’s Vale and Australia’s Rio Tinto and BHP Billiton – hold a stronghold on the seaborne market, accounting for over two thirds of seaborne shipments. The high capital costs required to mine iron ore, in addition to the necessary investments in support infrastructures such as railways, enacts as a barrier to entry to other players in the industry. It is thus very unlikely that the market concentration shifts away from the Big 3 miners in the short to medium-term.

This contrasts sharply with the fragmented nature of the steel industry, and it was no surprise when Vale, Rio Tinto and BHP Billiton were able in 2010 to force a change in the iron ore pricing mechanism from annual to quarterly, adding another layer of uncertainty to steel companies.

The increased demand for iron ore and coke has been reflected in the past years by an unprecedented rise in prices. Since 2008, prices have risen by 200% and 100%, respectively.

China in particular is responsible for this sharp price increase. Although it is the world’s largest iron ore producer by some distance, it still relies heavily on imported iron ore to satisfy its needs; in 2010, about 60% of total iron ore exports were destined to China. Thus, this industry’s prospects are dependent on the evolution of China’s steel production.

Demand for seaborne iron ore is expected to grow at a rate of 4-5% over the next decade12, a decrease from the 8.4% growth rate in the period 2000-2010. Thus, in order to keep up with demand, supply will need to expand in the next decade.

11

Canadian Minerals Yearbook 2009

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PAGE 23/30 Source: Analyst estimates

$100 $120 $140 $160 $180 $200 $220 $240

$80 $90 $100 $110 $120 $130 $140 $150

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

M

e

t

co

al

Ir

o

n

o

re

Iron ore Met coal

Figure 28 – Forecast of iron ore and met coal prices ($/tonne) 100

150 200 250 300 350

1-08 1-09 1-10 1-11 1-12

Chinese imported iron ore fines, 62% Fe, spot (CFR Tianjin port)

Met coal

Figure 30 – Iron ore and met coal price evolution (Jan 08 = 100)

8,4%

4,4%

2% 3% 4% 5% 6% 7% 8% 9%

2000-2010 2011-2020

Source: BHP Billiton

Current prices provide an incentive for that in the short to medium term, and the next few years will see new production reaching the world market. Vale, BHO Billiton and Rio Tinto alone hope to increase output by over 300 million tonnes in the next three years. However, due to the long time required to bring mines into production, the iron ore market is expected to be tight at least until the end of the decade. Additionally, existent mines’ productivity will decrease as reserves become depleted, further straining supply. Projected greenfield investments will also be affected by a range of factors that will hinder their ability of operating on schedule. Senior executives at Vale, BHP Billiton and ArcelorMittal note that a credit crunch by banks still worried by the Eurozone sovereign debt woes, a shortage of skilled labour and red tape for obtaining mining permits will obstruct the industry’s ability to ramp up production to match demand13.

However, the deceleration in the iron ore demand growth rate will prevent a supply shortage in the midst of the capacity expansion, keeping prices near its current levels for the next couple of years. After 2015, when extra capacity will reach the market, we forecast iron ore prices to gradually drop, reaching $90/tonne by 2021.

13

China Iron Ore 2012 conference organized by Metal Bulletin, held 27-29 February 2012 in Beijing Figure 31 – Growth rate of demand for

(24)

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PAGE 24/30

61%

14% 8% 3% 8%

5% 1% 0%

Canada* USA Mexico

Brazil Ukraine Kazakhstan

Bosnia Liberia

Figure 29 – Iron ore reserves as of December 31st

, 2011

Source: ArcelorMittal

54

84

5

11

14

0 10 20 30 40 50 60 70 80 90

2011 Operational efficiencies

Canada/Brazil expansion

Liberia phase 1 2015

Source: ArcelorMittal

*Excludes Baffinland

Figure 32 - ArcelorMittal 2015 mining expansion plans, million tonnes

Valuation

Reflecting the increasing importance of the exploration of base resources within the group, ArcelorMittal started to present its mining results in a separate segment in 2011, in order to “promote improved operating decisions and optimal capital allocation”. This change has been extremely significant to the group´s strategy, as it shifts from providing low-cost raw materials to steel facilities to selling at market prices, either internally or to external parties. Thus, it is more appropriate to now consider ArcelorMittal a steel & mining company than a vertically-integrated steel company; a subtle yet very important distinction that will affect the company’s fortunes in the next years.

Iron ore investments will be the focus of ArcelorMittal’s management in the coming years. This was demonstrated in late 2011 with the backtracking on the joint acquisition of MacArthur Coal, on the basis that the A$2.45 billion required would be better used elsewhere in the business.

Significant investments and breakthroughs have been recently made in the iron ore part of the division. In March 2011, ArcelorMittal acquired 70% controlling interest in Canadian firm Baffinland, which owns the high-grade Mary River mining project in northern Canada. Later in the year, phase 1 of the Liberia plan began with the shipment of the first batch of direct shipping ore (DSO).

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PAGE 25/30

Arcelor Mittal

BHP Billiton

$35 $37 $39 $41 $43 $45 $47 $49 $51 $53 $55

2011 2012 2013 2014 2015

Source: Analyst Estimates, BHP Billiton Figure 33 – Forecast of iron ore mining cost per tonne

20% 25% 30% 35% 40% 45%

Figure 34 – Cost-plus shipments (% of total shipments, including strategic agreements)

Source: ArcelorMittal, Analyst estimates

The expansions at ArcelorMittal Mines Canada, from 15 to 24 million tonnes, and Brazil (Serra Azul mine, from 1.7 to 3.5 million tonnes) are scheduled for 2013, whereas Liberia phase 1 production will be ramped up gradually up to 15 million tonnes concentrate in 2015. Moreover, on April 24th ArcelorMittal updated its projections by announcing that a an initial study indicated that the existing infrastructure has the potential to mine up to 30 million tonnes of iron ore concentrate per year. However, this has yet to be confirmed by a thorough feasibility study.

Furthermore, the scalable nature of these mining projects will allow the group to cut its unit operating costs gradually by 20% in 2015. Thus, on a constant $ basis, we estimate ArcelorMittal will achieve roughly a $43/tonne cost in 4 years’ time, placing it on par with the industry’s Big Three14.

In addition to this ambitious growth in production, ArcelorMittal is increasingly focusing its shipments on higher-priced market shipments in lieu of subsidizing the steel divisions via cost-plus shipments. As such, whilst cost-plus shipments are expected to increase 40% by 2015, marketable shipments will nearly double to 54 million tonnes in the same period, largely due to the 2012 market transition of AAMC and the ramp up in production from Liberia.

Looking beyond the 2015 target, ArcelorMittal has great hopes for the Mary River project in northern Canada. After spending $ $362 million for a 70% stake in Baffinland - the company controlling the rights for the project - it is currently under feasibility studies. Although it presents tough logistic problems due its location in the Arctic Circle - harsh weather conditions, inexistent railway and port facilities, environmental concerns and negotiations with the native Iniut tribes – the nine high-grade (Fe 66%) deposits have the potential to ship up to 18 million tonnes of Direct Shipped Pellet and Premium Sinter Fines ore per year.

Other iron ore projects still under feasibility study include Senegal, Mauritania and India.

(26)

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PAGE 26/30

0 5 10 15 20 25 30 35 40

0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 0,50

To

tal d

e

b

t

($

b

il

li

o

n

)

D

e

b

t

to

E

q

u

ity

Figure 35 –Evolution of ArcelorMittal’s debt

Source: Analyst estimates

2,6 4,5

5,1

6,3 6,4

2008 2009 2010 2011 2012 Figure 36 – Average maturity of

ArcelorMittal’s debt (in years)

Source: ArcelorMittal

Financials

We estimate ArcelorMittal’s debt to hover in the next few years around its present value ($25-30 billion). The debt-to-equity ratio debt will begin to fall in the middle of the decade - despite the forecasted increase in total debt - due to improved market conditions, higher profit margins in the steel business and higher mining volumes.

Furthermore, since 2008 the debt profile of ArcelorMittal’s debt has changed dramatically. Whilst in 2008 its financing relied heavily on short-term tools like bank loans, now most of it comes from long-term solutions like bonds, which provides greater resiliency to eventual shocks.

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PAGE 27/30 Source: BHP Billiton

Appendix

Imagem

Table 1 – Credit ratings and market  yields on debt
Figure 8 – Issued shares
Figure 10 -  Breakdown of variable steelmaking costs by process
Figure 12 – Hourly compensation costs in  manufacturing, $ (2010)
+7

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