Equity Structured Products and Warrants

This material has been produced by RBS sales and trading staff and should not be considered independent.

The Round Up
21 January 2011
Issue No. 483

The Round Up is a comprehensive

daily note produced by the RBS Global Market Action
Warrants team providing an overview Aussie Market Action
of market movements along with Equinox Minerals (EQNKZB)
quality ideas for warrant traders and
investors. Qantas (QANKZL)
S&P500 (SPFKZQ)
Australian Strategy
Scoreboard, commentary
SPI Comment, Events & Dividends
MINI Trading Buy – Citadel not priced in
MINI Trading Buy – ESG factors trending
positively
MINI Trading Short – US Market pullback
Monthly Market Review - December 2010

Daily Monitor
 Equity Structured Products and Warrants

Overnight Commentary

United States Commentary

US markets appeared to be running out of steam as a cracking result from MS and better than expected employment and
housing data failed to offset weakness within the tech sector. MS added 4.6% while F5 Networks shed 21.4% after lower
2nd Qtr guidance. Material stocks were impacted by strong Chinese data with Freeport McMoran Copper & Gold off
3.7% after lowering it sales forecasts. On the eco front Initial Jobless Claims and continuing claims were both lower than
expected while home sales increased.

United Kingdom and Europe Commentary

The FTSE was weaker over night with miners removing a majority of the points as strong Chinese data sparked
speculation of further tightening. Fresnillo, Kazakhmys, Xstrata, Lonmin, Anglo and BHP fell 3.6% to 5.9% on the back of
weaker commodity prices while Burberry fell 4.1% despite stronger than expected retail sales figures. Barclays provided
support, adding 2.4% as MS posted strong earnings while Lloyds added 0.9%. Utilities were lead by National Grid after a
broker upgraded the name to buy.
 Equity Structured Products and Warrants

Commodities Commentary

SPI Commentary
The SPI traded down 58pts to 4770. Open at 4828 with a high of 4831 and a low of 4760. Volume 32,410. Overnight the SPI traded
down 12pts to 4758.

SPI Intraday SPI Daily

*SPI report taken from the 9:50am open to the 4:30pm close on the previous trading day. Charts taken from IRESS

Upcoming Economic Events for the Week

Monday AUS New Motor Vehicle Sales (MoM)
US
Tuesday AUS
US NY Empire State Manufacturing Index , NAHB Housing Market Index
Wednesday AUS Westpac Consumer Sentiment
US MBA Mortgage Applications , Housing Starts
Thursday AUS
US Initial Jobless Claims , Continuing Jobless Claims , Existing Home Sales , Philadelphia
Fed Manufacturing Index , Crude Oil Inventories
Friday AUS Import Price Index (QoQ)
US
*Dates are indicative only and may change
 Equity Structured Products and Warrants

MINI Trading Buy:

Equinox Minerals (EQNKZB) - Opportunity: Citadel not priced in
We have factored CGG into our estimates for EQN, which has materially lifted our NPV. In our
view, the market has overlooked the value created by the deal, creating an opportunity for
investors. The stock remains one of our key picks for 2011. Strike $3.52, Stop Loss $4.17.

Source: IRESS

A solid end to the year, 45Mtpa processing rates under review

4Q10 production of 34kt was slightly higher than our estimate of 32kt on the back of a significant jump in ore processing
rates. Ore milled of 5.48kt (22Mtpa rate) was another record and comfortably above the 20Mtpa nameplate (EQN plans to
be at a 24Mtpa rate by year end). Copper ore grades fell significantly from 0.87% in 3Q10 to 0.69% (lower grades were
flagged, but slightly disappointing due to the read through to future years). Overall, it was a solid quarter, with full-year
production of 147kt ahead of 2010 guidance of 140kt. 2011 production guidance of 145kt was provided, slightly lower
than we were expecting (at a cash cost of US$1.45/lb). We note 2011 guidance could be conservative, as was the case
for 2010. Further, expansion studies now include a 45Mtpa processing-rate scenario (previously 35Mtpa), which could
provide further upside to our valuation.

Factoring in CGG has lifted our EPS

EQN now holds more than 93% of Citadel Resources (CGG) and is proceeding with the compulsory acquisition of the
remaining stock. We believe the deal is a credit to management, which has secured a high-quality asset at a low premium
relative to recent transactions. RBS Research EPS rises on average 9% over 2013-15 due to the CGG contribution.

EQN one of our top picks for 2011

The overriding factor is the completion of the CGG transaction and NPV accretion. We continue to see upside potential at
both Jabil Sayid, and Lumwana. Further, with copper remaining comfortably above US$4.00/lb, we see upside risk to
consensus earnings as higher commodity prices are factored in, in our view. Our NPV and target price have risen from
A$6.45ps to A$7.03ps after factoring in CGG, the end-of-year cash balance and other operational changes. EQN is one
of our key picks in 2011. Buy.
Security ExPrc Stop Loss CP ConvFac Delta Description
EQNKZA 2.2578 2.71 Long 1 1 Long MINI
EQNKZB 3.472 4.17 Long 1 1 Long MINI
 Equity Structured Products and Warrants

MINI Trading Buy:

Qantas (QANKZL): ESG factors trending positively

QAN has embraced ESG reporting, which in our view is important in such a challenging
industry. In this note we update QAN's FY10 sustainability performance in detail, noting it was
generally positive across most measures. With QAN trading below 1.0x P/B, we maintain our
Buy recommendation. Get long QANKZL

Source: IRESS

2010 ESG data points largely trended well

On a majority of the ESG data points we track, QAN trended positively in FY10. Positively, fuel efficiency continued to
improve as new aircraft were brought into the fleet (ASK/bbl increased by a solid 2.7% on the pcp), governance measures
strengthened, and operational performance (on-time arrivals and load factor) improved. On the negative side, the lost
time injury frequency rate (LTIFR) increased marginally (from 4.2 to 4.3), while the workforce is aging, suggesting QAN
may be having more difficulty attracting new employees.

Valuation upside potential dominated by fuel efficiencies

Our long-term DCF valuation is most influenced by potential fuel efficiency improvements (+54%), offset by carbon
pollution reduction scheme imposts (-25%). Operational measures such as passenger yields and load factors are also
influential, and are affected by QAN's performance in relation to customer satisfaction and brand. Risks are ever-present
in the airline industry, but we believe QAN has well defined risk management policies to react to and minimise these risks
as much as possible.

QAN compares well on ESG metrics to peers and the broader S&P/ASX 200
The aviation industry generally is focused on ESG issues given impending emission trading schemes globally. In our
view, QAN shows particularly strong engagement on ESG issues, with many initiatives integrated into business
operations. Not surprisingly, therefore, comparative data shows QAN generally ranking in the top half on ESG metrics
against peers and strongly against the broader S&P/ASX 200 on ESG related disclosure.

QAN good value at <1.0x P/B, reiterate Buy recommendation

We believe that QAN's positive ESG metrics should have a positive influence on its trading multiples. However, QAN is
currently trading at both a P/E and P/B discount to its global peers due in large part to the recent A380 issues. With the
fleet now returning to normal operations, we expect QAN to rerate and maintain our Buy recommendation.

RBS MINIs over QAN

Security ExPrc Stop Loss CP ConvFac Delta Description
QANKZL 1.6607 1.83 Long 1 1 MINI Long
QANKZM 2.02 2.23 Long 1 1 MINI Long
 Equity Structured Products and Warrants

MINI Trading Short:

S&P 500 – US Market pullback
The US S&P 500 has rallied significantly over the festive season on reasonably light volumes. From
the end of August 2010 to 17th January 2011 the S&P500 has jumped 24% compared to a relately weak
11% gain in the Australian XJO over the same 4.5 month period. We expect to see a modest pullback
in the S&P500 as the large mutual funds return from holidays and look to take profits in many of their
positions.

SPFKZQ (Stop Loss at 1,313) is the instrument to play a pullback (Or SPFKZR higher Stop Loss of
1,396) and we believe the S&P500 futures could easily fall from 1,262 to 1,220 and even below 1,200
before the end of January.

Alternatively, some traders will prefer a pairs trade to take advantage of the US outperformance and
therefore mitigate the market risk of global economic news. Traders wishing to use this strategy can
therefore Buy 1 Long MINI XJOKZL for every 4 SPFKZQ shorts (market exposure of 1 XJOKZL is $47
and 1 SPFKZQ is $12.60).

We would look to close out this trade at around 1,220 in the S&P 500 and this would return ~65%
purely in the SPFKZQ MINI.

Source: IRESS

Pure S&P500 Short play

Security ExPrc Stop Loss CP ConvFac Delta Description
SPFKZQ 1382 1313 Short .01 1 MINI Short
SPFKZR 1469.8 1396 Short .01 1 MINI Short

Pairs trade
Buy 1 Long MINI XJOKZL for every 4 SPFKZQ shorts

Security ExPrc Stop Loss Type ConvFac Delta Description

XJOKZL 4088.4 4293 Long .01 1 MINI Long
SPFKZQ 1382 1313 Short .01 1 MINI Short
 Equity Structured Products and Warrants

RBS Round Up Corner:

Monthly Market Review - December 2010

Global equities staged a late rally into the close of the year and Australian equities rebounded
by 3.5% in December. RBS forecasts 20% returns for the S&P/ASX 200 in 2011, up to 5700 by
year end, supported by growing confidence in the global economic outlook.

Australia's performance vs the world

In local currency, the All Ordinaries (+3.6%) underperformed the US S&P 500 (+6.5%), the World MSCI ex
Australia Index (+7.1%) and the regional MSCI ex Japan Index (+6.7%).

The best- and worst-performing sectors

The best performers for the month were Information Technology (+6.9%), Materials (+6.5%) and Energy
(+4.6%). The worst performers were Telecommunication Services (-0.8%), Property (-0.2%) and Consumer
Discretionary (+0.6%).

The top-five and bottom-five performing S&P/ASX 200 stocks

The top-five performers from the S&P/ASX 200 (price) Index for the month were Sundance Resources
(+59.7%), Energy World Corporation (+50.0%), Aurora Oil & Gas (+47.9%), Tower Australia (+46.0%) and
Mirabela Nickel (+37.8%). The bottom-five performers were St Barbara (-20.0%), The Reject Shop (-18.8%),
Sigma Pharmaceuticals (-14.0%), Hastie Group (-13.2%) and Perpetual (-12.1%).

Consensus earnings revisions

The top-five upgrades were Boart Longyear (+12.2%), Lend Lease (+10.7%), OZ Minerals (+5.6%), Ramsay
Health Care (+5.5%) and Origin Energy (+3.7%). The top-five downgrades were MAp Group (-90.3%),
Westfield Group (-12.7%), Billabong (-9.1%), Riversdale Mining (-8.6%) and Aristocrat Leisure (-8.5%).
 Equity Structured Products and Warrants

Looking back and looking forward

As we moved towards the close of the year, equity markets have staged a late rally back towards pre-Lehman
levels. Equity and currency markets are less concerned about periphery Europe than bond markets, and
equities are slowly rerating, a trend we expect to continue in 1H11. In local terms, in December the S&P 500
was up 6.5%, the Stoxx 600 was up 5.3% and the S&P/ASX 200 was up 3.5%. We note the rally has been
broad-based as equities in Spain, Italy, Portugal and Ireland have also participated. The sovereign bond
markets are not so relaxed, and European peripheral bond yields and CDS spreads are close to their highs,
highlighting to us that sovereign risk in Europe will be an ongoing concern. The catalysts for this late stage
rally are a combination of reduced US recession risk and reduced concerns about European contagion risk.
Investors are retreating from bond funds following signs of a US economic recovery and the stock market rally
has increased speculation that interest rates may rise.

US economic growth gaining momentum – Alongside continued monetary accommodation in the US, the
economic recovery looks to be picking up momentum, providing a firmer macro backdrop as we move into
2011. The December Philly Fed highlighted the trend, with forwardlooking components returning to the
stronger March-April levels that were interrupted by the European sovereign crisis from May. In particular, the
expected capex component is at its strongest level since mid-2005, and the prices paid component suggests
inflation should normalise. This is particularly important, given monetary policy must now give way to the
private sector to drive economic growth. We highlight US capex as a significant equity market theme as we
move into 2011. In addition, small to medium-sized enterprises are beginning to rehire and income growth is
driving consumer spending.

European stability – While improving economically, Europe remains vulnerable to pockets of deflation and a
resurgence of European sovereign debt woes as this structural issue takes time to repair. From an economic
perspective, the manufacturing PMIs in core Europe have remained resilient as demand in foreign markets
has benefitted the region. The latest survey data continue to point to ongoing recovery in the euro area
business cycle, albeit at muted levels. It will likely
take time for a sustained domestic demand recovery to emerge in Europe, while real income growth remains
moderate in an environment of modest employment and wage growth. We expect peripheral sovereign debt to
weigh on markets from time to time, but we note investors appear less concerned that this will cause outright
financial markets seizure, as was feared in May this year. Also, at the latest ECB press conference there was
a clear desire to ensure the stability of the Eurozone and a greater willingness to use the bond purchase
programme (SMP). Chinese officials have also offered to step up their support of European stabilisation
efforts. What form this might take is unclear, but at the very least should be successful in lifting sentiment.

Chinese property – We highlighted Chinese residential construction as a linch-pin for our investment strategy
going forward, as this sector is 33% of steel demand. The IMF’s new report on Chinese property highlights
some interesting conclusions, notably that house prices do not appear to be significantly higher than justified
by fundamentals. While there may be overvaluation in some coastal cities, developments are still ‘early stage’.
Moreover, there are powerful structural drivers underpinning the housing market, namely low real interest
rates, strong income growth and a low mortgage-to-GDP ratio. We believe these drivers will result in a wider
economic rebalancing, providing the global economy with an invaluable growth engine for the foreseeable
future.

Australian economic growth on a rising trend – RBS economist Kieran Davies expects 3.7% growth yoy for
2011, and we expect Australia to remain in the fortunate position of enjoying buoyant terms of trade while also
generating significant export volume growth through the expansion of iron ore, coal and LNG operations.
Australia’s increasing dependence on China, however, does give rise to risks of greater volatility. RBS expects
the RBA to take the cash rate to 6% by the end of 2011. The RBA responded recently to the risks to medium-
term inflation, given the strong growth outlook and limited spare capacity in the economy. The market is
currently pricing in 25bp to end 2011 and we expect this to change as the outlook for growth in advanced
economies firms. On our forecast cash rate of 6% by the end of 2011, we expect rates to take 2ppt off income,
as the RBA’s actions would be magnified by higher household debt. However, on the positive side, our banks
team does not forecast further increases in the standard variable rate above the cash rate from here. The tight
labour market (unemployment now at 5.2%) is now feeding through to wages growth; this month we saw the
wage price index up 1.1% in the quarter, a sharp increase from 0.8% in 2Q10 and showing the fastest growth
since 4Q08. This gain lifts annual growth in this key measure of wages from 3.0% to 3.5%, although it is still
well short of the peak of 4.3% reached in 4Q08. Also, given hours worked are rising at a rate of 3.1% yoy
combined with wages growing at about 3% (and, given previous experience, that wages could grow at 4% or
 Equity Structured Products and Warrants

above), we estimate household income could grow into the high single digits. Indeed, the six-month
annualised growth in the national accounts measure of compensation of employees was 9.6%. Even
detracting an additional 2ppt of debt service given our profile of the RBA cash rate would
leave mid-single-digit household income growth available for consumption growth.

Continued sovereign risk a possibility – Let us not forget the discount applied to Australian equities for
sovereign risk post the Henry Tax Review and, specifically, the handling of the MRRT, a topic international
investors are reluctant to dismiss going forward. Australian sovereign risk will remain topical as 2011 is
unlikely to be quiet on this front, in our view.

RBS targets for 2011 – The continued rebound of corporate earnings means current valuations
continue to look cheap, reinforcing our constructive view on equities. With near-term earnings risk
modest and the outlook for continued earnings growth of 18.8% (IBES) on a 12-month-forward
basis relatively assured, in our view, we project market growth in line with 12-month-forward
earnings to reach 5657. If we then apply a modest 5% PE rating from 12.8x 12-month-forward
currently to 13.5x (still at a 5% discount to long-run average of 14.2x), this indicates the market
has potential upside of 20% to 5700.
 Equity Structured Products and Warrants

For further information please do not hesitate to contact us on the details below

Equities Structured Products & Warrants

Toll free 1800 450 005 www.rbs.com.au/warrants
Trading Products Team
Ben Smoker 02 8259 2085 ben.smoker@rbs.com
Ryan Corrigan 02 8259 2425 ryan.corrigan@rbs.com
Investment Products Team
Elizabeth Tian 02 8259 2017 elizabeth.tian@rbs.com
Tania Smyth 02 8259 2023 tania.smyth@rbs.com
Robert Deutsch 02 8259 2065 robert.deutsch@rbs.com
Mark Tisdell 02 8259 6951 mark.tisdell@rbs.com

Disclaimer
The information contained in this report has been prepared by RBS Equities (Australia) Limited (“RBS Equities”) (ABN 84 002 768 701) (AFS Licence No 240530) and has
been taken from sources believed to be reliable. RBS Equities does not make representations that the information is accurate or complete and it should not be relied on as
such. Any opinions, forecasts and estimates contained in this report are the views of RBS Equities at the date of issue and are subject to change without notice. RBS
Equities and its affiliated companies may make markets in the securities discussed. RBS Equities, its affiliated companies and their employees from time to time may hold
shares, options, rights and warrants on any issue contained in this report and may, as principal or agent, sell such securities. RBS Equities may have acted as manager or
co-manager of a public offering of any such securities in the past three years. RBS Equities’ affiliates may provide, or have provided banking services or corporate finance to
the companies referred to in this report. The knowledge of affiliates concerning such services may not be reflected in this report. This report does not constitute an offer or
invitation to purchase any securities and should not be relied upon in connection with any contract or commitment. RBS Equities, in preparing this report, has not taken into
account an individual client’s investment objectives, financial situation or particular needs. Before a client makes an investment decision, a client should consider whether any
advice contained in this report is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any
recommendation without first having consulted with your advisor for a personal securities recommendation. The information contained in this report is general advice only.
RBS Equities, its officers, directors, employees and agents accept no liability for any loss or damage arising out of the use of all or any part of the information contained in this
report. This Information is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local
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The warrants contained in this report are issued by RBS Group (Australia) Pty Limited (“RBS”) (ABN 78 000 862 797, AFS Licence No. 247013). The Product Disclosure
Statements relating to these warrants are available upon request from RBS Equities or on our website www.rbs.com.au/warrants
RBS Group (Australia) Pty Limited is not an Authorised Deposit-Taking Institution and these products do not form deposits or other liabilities of The Royal Bank of Scotland
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© Copyright 2009. RBS Equities. A Participant of the ASX Group.

Explanation of Warrant Tables

Security – refers to the code ascribed to the warrant, ExDate – refers to the date on which the warrant expires or is reset, ExPrc – refers to the exercise price, or second
instalment payment, CP – tells you whether the warrant is a call or a put, ConvFac – the conversion factor of the warrant which tells you how many warrants you need to
exercise in order to take possession of 1 share, Delta – tells you how much the warrant will move for a 1c move in the underlying security, Description – Tells you the type
of warrant.
All charts taken from IRESS unless indicated otherwise