Latin American Equity Research

Company Report

Buenos Aires, September 11, 2012

LatAmMetal and Mining

TERNIUM

BUY

Solid Fundamentals to Outweigh Short-Term Uncertainty

Walter Chiarvesio*

Eugenia Fernandez Pouchan*

Santander Rio Sociedad de Bolsa S.A.

+5411 4341-1564
wchiarvesio@santanderrio.com.ar

Santander Rio Sociedad de Bolsa S.A.

+5411 4341-1218
mfernandezpouchan@santanderrio.com.ar

(9/11/12)
CURRENT PRICE: US$19.60
TARGET PRICE: US$25.80
Whats Changed
Rating

Maintain Buy

Target Price (US$)

Introducing YE13: 25.80

EBITDA Estimates (US$ Mn) 12 to 1,385 from 1,592

13 to 1,413 from 1,589
14 Introducing 1,544

Company Statistics
Bloomberg
52-Week Range (US$)
2013E P/E Rel to the MSCI LatAm (x)
2013E P/E Rel to M&M (x)
MSCI (points)
3-Yr EBITDA CAGR (12-15E)
Market Capitalization (US$ Mn)
Float (%)
3-Mth Avg Daily Vol (US$ Mn))
Shares Outst Mn (ADS: 10:1)
Net Debt/Equity (x)
Book Value per ADS (US$)

TX
15.10-25.40
0.7
0.9
3,633.0
6.0%
3,922.0
24.4
9.7
200.5
0.4
28.1

Estimates and Valuation Ratios

Net Earn (Local Mn)
Current EPS
Net Earn (US$ Mn)
Current EPADS
P/E (x)
P/Sales (x)
P/CE (x)
FV/EBITDA (x)
FV/Sales (x)
FCF Yield (%)
Div per ADS (US$)
Div Yield (%)

2011
NA
NA

2012E
NA
NA

2013E
NA
NA

2014E
NA
NA

514
2.6
7.6
0.4
4.3
4.0
0.7
1.2
0.73
3.7

64
0.3
61.7
0.5
8.9
4.9
0.8
-6.3
0.73
3.7

510
2.5
7.7
0.5
4.2
4.8
0.8
4.3
0.75
3.8

571
2.9
6.9
0.5
3.9
4.4
0.8
16.9
0.76
3.9

NA: Not available. Sources: Bloomberg, company reports, and Santander

estimates.

Investment Thesis: Terniums solid medium-term fundamentals should

outweigh short-term concerns about the steel sector, and should lay the
groundwork for a 6.0% EBITDA CAGR for 2012-15. Although we do
not expect short-term catalysts for the stock, we believe that investors
should add to their positions over the next six months. We believe that
Ternium is a good vehicle for investors to participate in the LatAm steel
sector, based on the following value drivers:
Capacity expansion focused on higher-end products. An increase in
CRC and galvanizing capacity in Mexico should allow TX to deplete its
spare capacity in HRC lines, leading to an improved product mix, and to
increased value-added spreads. We estimate this could be reflected in at
least a 4% increase in TXs revenue/tonne after 2013. This should
partially offset our lower reference price for steel (HRC U.S.), which we
expect to decline 8% and 11% in 2012 and 2013, respectively.
Volume growth: positive in North America, cautious in South
America. In addition to an improvement in Terniums value-added mix,
we expect total shipments in Mexico to continue to grow 3% annually
through 2015. However, in South America, we expect a 10% decline in
2012, a flat 2013, and a resumption of growth in 2014 of 2%.
Operating flexibility. DRI/EAF technology and a slab deficit in an
excess crude steel supply scenario provides Ternium with lower
operating leverage to shore up declining margins in the short term. At
the same time, TX should continue to access natural gas at low relative
cost in Mexico (US$3-4/Mbtu), which compares positively with coal
above US$200/tonne for blast furnace facilities.
Reasons for change to price target. We are introducing our YE2013
target price of US$25.80, replacing our US$32.10 YE2012 target price,
based on (1) lower short-term earnings estimates following lower global
steel prices and a more conservative growth outlook in South America,
(2) lower short-term margins in Argentine operations due to increasing
regional exports at higher costs, (3) lower weight of Usiminas in our
NAV due to a lower target price for YE2013 than for YE2012, and
(4) higher country risk in Argentina. Our EBITDA estimates for 2012
to 2015 are 3% to 7% below consensus. However, we maintain our
Buy rating, suggesting 35.5% total-return potential.
Valuation and Risks: Our YE2013 target price is based on a DCF
model, with WACC of 10.7% and perpetuity growth of 2.5%.
Risks include poor global and regional economic growth, lower steel
prices, higher raw material costs, and political risk.

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.
* Employed by a non-US affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules.

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

Ternium is one of the main steel producers in LatAm, with manufacturing facilities in Argentina (Siderar) and Mexico
(Hylsa and IMSA). It has total crude steel and rolling capacity of approximately 7.0 million and 9.95 million tonnes per
year, respectively. In 2011, 85% of the companys revenue was related to flat steel products, including cold-rolled coils
and sheets, tin, galvanized and electro-galvanized sheets, prepainted sheets, and tailor-made flat products. It also
produces long steel products, such as bars and wire rod, which represented 15% of the companys total revenue in 2011.
In January 2012, Ternium acquired 115 million ordinary shares of Usiminas, giving it a 17% economic stake in the
company and 10% direct and indirect participation on the voting shares. The Techint Group is the largest shareholder in
Ternium, with a 62% stake, followed by Tenaris with an 11% share, 2% are in the Treasury, and the remaining 24%
floats in the New York Stock Exchange. The company was incorporated in Luxembourg.

INVESTMENT THESIS
Long-term positives outweigh short-term risks. Our Buy rating is predicated first, on the
companys consolidated and expanding position in the Mexican steel market, which has
attractive growth potential; second, on the companys flexible technology based on Direct
Reduced Iron (DRI)/Electric Arc Furnace (EAF) usage and lower operating leverage
provided by its flat crude steel deficit that would allow the company to better weather a
potential global economic disruption affecting the cyclical steel sector; and third, on TXs
access to lower-than-average energy costs (for natural gas and electricity) in North America.
We believe that these medium- to long-term positive drivers offset short-term concerns
about the global economic outlook, industry oversupply, and global steel prices, as well as
the deceleration of steel demand in Argentina fueled by the economic slowdown that affects
the South American operations. Finally, we note that the recent target price change for
Usiminas (our analyst Felipe Reis introduced the YE2013 target price of R$7.00 for
preferred shares, USIM5) also negatively affected our NAV assessment even after
accounting for a 35% controlling premium, to reach a value of BRL9.45/ON USIM3. (Please
refer to our September 10 report, Usiminas: Improving Performance Ahead Doesnt Mean
an Attractive Stock.)

MAIN VALUE DRIVERS

Capacity expansion should allow TX to increase value-added spreads beyond 2013.
TX is proceeding with its cold rolling capacity (CRC) expansion at Pesquera of 1.5
million tonnes, which it expects to start up in 3Q13. We estimate that once production
begins, the new facility will allow sales volume in the North American (NA) region to
increase the depletion of its flat steel hot rolling capacity (HRC), which is currently
working at less than 70%. Moreover, we think that TX will be able to improve its mix of
steel products toward higher-value-added steel, from 50% HRC/50% CRC to 25%
HRC/75% CRC, implying reported average revenue per tonne improvement of 4%, or
roughly US$40-50/tonne, according to our estimate. In addition, the company is also
expanding its galvanizing capacity by 400,000 tonnes, in association with Nippon Steel, to
supply the automotive industrys specific requirements, which should also improve
Terniums products mix.
Operating flexibility in a weak demand environment. DRI/EAF technology in the NA
region gives Ternium more operating flexibility, in our view, during economic slowdown
periods than does blast furnace (BF) and basic oxygen furnace (BOF) technologies. TXs
crude steel capacity based on the former technology is 58% of the total, including flat and
long steel in Mexico (world steel production in 2011 was DRI 4% and EAF 29%, according
to the World Steel Association). We also believe that the crude steel deficit becomes an
advantage under an excess supply scenario.
2

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

Low energy cost in North America should continue to benefit Ternium. DRI is fed with
natural gas that is currently priced at low levels in NA following the increasing development
of nonconventional (shale) gas in the U.S. Although the recent price below US$3/MBtu is
presumably driven by short-term effects, we think that the NA region will enjoy natural gas
prices that are lower than those for other regions. Our model assumes that natural gas prices
(U.S. referenceHenry Hub) will reach a steady US$4.00/MBtu in 2014. A sensitivity
analysis suggests that a US$1.00 increase in natural gas prices in 2013-17 implies US$55
million lower EBITDA and a 0.60% lower margin in 2012.
Positives
70% of Installed capacity located in Mexico, on
which we have a positive economic outlook.
Expansion capacity focused in downstream valueadded projects should allow TX to sustain price
premiums for its products.
Flexible technology (DRI/EAF vs. BF/BOF) to cut
production in a worse-than-expected economic
scenario.

Concerns
Uncertain outlook of global and U.S. steel prices.
Sector cyclicality in current
economic environment.

uncertain

global

Slowing growth and tighter margins in South

America.

Access to competitive energy costs, mainly natural

gas.
Partial hedge of raw material costs: slab deficit in
an excess supply scenario; iron ore mines in tight
market conditions.

MODEL ASSUMPTIONS
Volume growth (Figure 1), positive in North America (NA), cautious in South America
(SA):
1) In Mexico, we expect steel demand to remain strong, backed by an economy that we
expect to grow 3.8% and 3.6% in 2012 and 2013, respectively, according to our economic
teams forecast. We expect flat steel volume in NA to show a three-year CAGR of 3.0%
in 2012-15, in-line with 1H12 growth. In the long run, we think that TXs low-utilization
HRC capacity and previously mentioned downstream expansion will allow the company
to meet growing demand over the next ten years, for which we assume a long-term annual
growth rate of 2.5%.
2) SA partially sustained by regional exports at lower margins in the short term. In SA,
we expect volume to decline around 10% in 2012 (1H12 was down 8.6% YoY) due to a
deterioration of economic activity in Argentina, and to remain flat until 2015. The
economic slowdown in Argentina is hurting local steel demand, mainly from a setback in
the automotive industry and construction, in our view, which together account for 60% of
Terniums Siderar demand. Although the consensus economic outlook for 2013 is mildly
positive, relying mainly on Brazils economic and agricultural sector recovery, we think
that there is a significant risk for this outlook not meeting expectations. Ternium expects
to offset lower demand in Argentina with regional exports but at the expense of higher
operating costs (upfront export taxes of 5% and freight) and consequently lower margins.
Argentine Siderars 2Q12 has signaled this trend, posting exports of 89,000 tonnes (12%
of total shipments) compared with an average of 36,000 tonnes (7% of total shipments)
during the previous four quarters, at the same time that local volume sales declined 13%
YoY.
3) For the long steel segment we expect volume to grow 7% in 2012 and 2% annually until
2015, reaching full capacity utilization by that time considering both regions.
Important disclosures/certifications are in the Important Disclosures section of this report.
U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

Figure 1. Volume AssumptionsFlat (l)/Long (r) (Million Tonnes)

South & Central America

North America

2023E

2021E

2019E

2017E

2015E

2013E

2011

2009

2007

2023E

2021E

2019E

2017E

2015E

2013E

2005

0.0

2011

2.0

2009

4.0

2007

6.0

3.5 1.4
4.4
2.4
4.8
3.1
3.0
3.7
1.9 3.1
2.9
3.9
3.3
4.0
2.9
4.1
2.9
4.3
3.0
4.4
3.1
4.5
3.2
4.6
3.2
4.7
3.3
4.9
3.3
5.0
3.4
5.1
3.5
5.2
3.6
5.4
3.6
5.5

8.0

2.5
2.0
1.5
1.0
0.5
0.0

0.7 0.5
0.9
1.2
1.3
1.1
0.5
0.9
0.1 0.9
0.3 1.0
0.4
1.1
0.4
1.2
0.4
1.3
0.4
1.3
0.4
1.3
0.4
1.4
0.4
1.4
0.4
1.4
0.4
1.4
0.4
1.4
0.4
1.4
0.4
1.4
0.4
1.4

North America

2005

South&Central America

10.0

Sources: Santander and company reports.

Global steel reference prices on a downward trend. Our model uses a path of
international reference prices (hot rolled coils in the U.S. for flat steel, billet in LatAm for
long steel) and a path for spreads to reach average revenue per tonne relevant to Ternium.
Our model reflects a conservative outlook for steel prices, which are 13% lower, on average,
than our previous assumptions for 2012-15, based on:
1) Concerns about the global economy. PMI indicators are not yet showing convincing
signals of economic growth; particularly in China, which accounts for 45% of global steel
demand; and credit event risk in Europe may threaten global financial stability.
2) Deceleration of Chinas steel consumption. Chinese steel consumption per capita
reached 460kg/inhabitant in 2011, a CAGR of 9.6% in 2005-2011, but +6.0% in 2011,
according to the World Steel Association. During the first seven months of the year, we
estimate that apparent crude steel consumption in China slowed further to 1.0% YoY.
3) Crude steel oversupply concerns in a context of weakening demand growth.
Regarding spreads, we think that TX will be able to improve premiums, mainly in NA, based
on the previously mentioned capacity expansion to improve its product mix in terms of value
added, which should start being reflected in 2H13 results.
Figure 2. Average Revenue and Spreads per Tonne (USD/Tonne)Flat (l)/Long (r)

1,500

800
600
400
200

Local Spread

2023E

2021E

2019E

2017E

2015E

2013E

2011

2009

2023E

2021E

2019E

2017E

2015E

2013E

2011

2009

2007

2005

2007

2005

500

Billet LatAm

1,000

587 97
613 124
603
196
982
123
498
303
625
317
756
306
695
307
620
335
620
347
615
347
600
347
590
347
590
343
580
339
580
333
570
333
560
333
560
331

1,000

Local Spread

333
181
398
183
495
120
848
6
408
135
530
119
661
158
602
206
543
194
543
194
538
194
525
194
516
194
516
194
508
194
508
186
499
186
490
186
490
186

HRC US

Source: Santander, company reports.

Ternium should be better positioned in an oversupplied steel market. Although an

excess of crude steel supply may exert downward pressure on prices across the steel value
chain, we think that Terniums exposure to the higher-end products market (CRC,
galvanized, etc.) and slab deficit provides lower operating leverage in such a context. We
think that Terniums pricing power is more local-market driven by its meeting specific
requirements of local clients, thus providing a barrier to entry. Recent trends in steel and raw
4

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

material prices have been benefiting TX, preventing further margin contraction, with U.S.
HRC prices outperforming TX raw materials such as slab, iron ore, and, to lesser extent,
scrap (see Figure 3).
Figure 3. HRC Steel and Raw Material Price RatiosRelevant for Ternium*
4

HRC US/SCRAP US

HRC US/SLAB

2.00

3
1.50
1.00

0.50

0.00

J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12

J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12

*Assuming iron ore need of 1.5x. Sources: Santander and Bloomberg.

In sum, we still expect margins to compress in 2012, to be flat in 2013, and to recover
thereafter. Based on our price, volume, and cost dynamic assumptions, we expect
EBITDA/tonne to remain flat until next year and to recover in 2014 to an average of
US$176/tonne for the following ten-year window. Likewise, we expect margins to recover to
an 18% average and remain near that level after 2014.
Figure 4. Model implied Operating Metrics

Sales Volume (Mn tonne)

Average Revenue/Tonne (US$)
Total Revenues (US$ Bn)
Cash Costs per Tonne (US$)
EBITDA per Tonne (US$)

2008

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

8.17
1,061
8.96
746
274

6.36
758
4.96
595
107

8.05
895
7.38
664
178

8.82
1,021
9.14
765
189

8.70
966
8.48
726
159

8.85
915
8.17
672
160

9.07
925
8.46
673
170

9.33
925
8.71
667
177

9.55
905
8.72
656
169

CAGR
20122015
2.4%
-1.5%
0.9%
-2.8%
3.5%

EBITDA (US$ Bn)

2.24

0.68

1.44

1.67

1.39

1.41

1.54

1.65

1.62

6.0%

EBITDA Margin
Net Debt/EBITDA

25.0%
0.94

13.7%
0.27

19.5%
(0.48)

18.2%
(0.27)

16.3%
1.69

17.3%
1.64

18.3%
1.17

18.9%
0.73

18.6%
0.36

NM
NM

Sources: Santander and Bloomberg. NM: Not meaningful.

CAPEX, LEVERAGE, AND CASH FLOW

Following TXs guidance, we assume total capex of US$1.0 billion in 2012, US$700
million in 2013, and US$350 million per year thereafter. According to the company (20F2011), TX is focused on downstream expansion and on revamping project facilities in the
amount of US$1.7 billion in 2011-13. The most significant projects in our view follow.
1) Cold rolled coil expansion, Mexico. +1.5 million tonnes: US$700 million, or
US$470/tonne. Start-up expected in 3Q13. This expansion leads CRC capacity in
Mexico to 4.0 million tonnes. Our model assumes that TXs current volume mix of 50%
HRC + 50% CRC improves to 25% HRC + 75% CRC, based on installed capacity
utilization of 80% in the CRC line.
2) Tenigal, Mexico. In partnership with Nippon Steel: 400,000 tonnes of galvanized steel
for the automotive industry; US$350 million, or US$875/tonne. Start-up expected in
3Q13. The facility is expected to be fed with 200,000 tonnes of ultra low-carbon steel
produced by Nippon in Mexico, and the remaining capacity is expected to be fed by
TXs own line of CRC.
Important disclosures/certifications are in the Important Disclosures section of this report.
U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

3) Continues casting line (slab) expansion, Argentina. +500,000 tonnes, for a total cost
of US$180 million, or US$360/tonne. Start-up expected in 2013. This line will narrow
Terniums slab deficit at aggregated levels, but implies a surplus of 450,000 tonnes in
Argentina that offsets the deficit in Mexico, which we estimate to be normally 2.5
million tonnes. For modeling purposes, we assume that the new slab capacity will be
dispatched to Mexico.
4) Hot rolled coil expansion, Argentina. New coiler to add 100,000 tonnes at a total cost
of US$80 million, or US$800/tonne. Start-up expected in 2013.
5) Vacuum degassing facility, Argentina. New ultra low carbon steel capacity of 1.2
million tonnes to meet automotive industry requirements. Total investment of US$50
million, or US$42/tonne. Expected for 2Q13.
Figure 5. Ternium Installed Capacity Break-Up (Thousand Tonnes)
2008

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

CAGR
20122015E
3.1%

Slabs

5,000

5,000

5,000

5,000

5,200

5,450

5,700

5,700

5,700

Billets

1,800

1,800

1,800

1,800

1,800

1,800

1,800

1,800

1,800

0.0%

Total Crude Steel Capacity

6,800

6,800

6,800

6,800

7,000

7,250

7,500

7,500

7,500

2.3%
1.2%

Argentina (Flat Steel)

2,850

2,850

2,850

2,850

2,850

2,950

2,950

2,950

2,950

Mexico (Flat+Long Steel)

6,800

6,800

6,800

6,800

7,100

7,100

7,100

7,100

7,100

0.0%

Total Rolling Steel Capacity

Hot rolled Coils
Cold rolled Coils
Coating
Rebars & Wire Rods

9,650
8,550
4,300
2,900
1,100

9,650
8,550
4,300
2,900
1,100

9,650
8,550
4,300
3,500
1,300

9,650
8,550
4,300
3,500
1,300

9,950
8,850
4,300
3,640
1,300

10,050
8,950
5,800
3,940
1,300

10,050
8,950
5,800
3,940
1,300

10,050
8,950
5,800
3,940
1,300

10,050
8,950
5,800
3,940
1,300

0.3%
0.4%
10.5%
2.7%
0.0%

Sources: Company presentations as of August 2012 and Santander estimates.

Azu project unlikely to advance in the short term. After the purchase of the stake in
Usiminas, TX said it changed the project, originally based on BF/BOF, to DRI/EAF
technology. TX would need to assure the provision of natural gas at reasonable costs and
iron ore, to feed the facilities. We think that this project will be suspended for a while until
conditions are met, and we do not include it in our model.
Usiminas: TX has not provided a full explanation about how synergies might benefit
Ternium, so we conservatively exclude such assumptions in our model. Thus, the impact on
our target price would stem from the value on the NAV. Considering our YE2013 target
price of US$3.33 for USIM5 (R$7.00 and FX of R$2.10/US$) and a 35% premium on the
ordinary USIM3, we reach a value of US$518 in TXs NAV (6% of TXs NAV, or
US$2.58/ADS). Despite our constructive view on the ability of TXs management to turn
around Usiminas, based on its experience in other countries, our analyst in Brazil, Felipe
Reis continues to have a cautious view on the company and the steel sector in Brazil. In any
case, in-line with the companys view, we think that the impact will not be visible in the
short term and that it remains a long-term call. (Please refer to our September 10 report,
Usiminas: Improving Performance Ahead Doesnt Mean an Attractive Stock.)
Leverage at reasonable levels. TXs net debt amounted to US$2.05 billion, from a previous
positive cash position due to the acquisition of 115 ordinary shares in Usiminas (80 million
shares by TX and 25 million by Siderar), implying 1.69x estimated net debt/EBITDA in
2012E. Terniums cash distribution follows: (1) Ternium Mexico holds US$221 million in
cash, with net debt of US$1.34 billion; (2) Siderar holds US$116 million in cash, with net
debt of US$400 million; thus, we estimate that TX holds cash of US$150 million and net
debt of US$316 million at the holding level. Our model reflects that under current
assumptions, TX would take around five years to be net cash positive again.
6

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

EARNINGS REVISIONS
Our downward earnings revision is due mainly to a more conservative outlook on global
steel prices and volume sales in South America, with lower margins due to exports from
Argentina to neighboring countries.
We believe that 2H12 will not bring positive earnings surprises, in-line with TXs
guidance for 3Q12. The company guided for flat volume and slightly declining steel prices
in 3Q12, which are already materializing in reference prices. In addition, we think that
declining raw material costs recently observed (through iron ore and coal prices) will not be
manifested before 1Q13 due to contract structures and accounting practices.
Our bottom-line estimate for 2012 has dropped steeply, as we assume impairment on
the Usiminas stake book value. The magnitude of this impact is difficult to predict but it is
purely an accounting change that has no impact on cash flow and taxes. We assume, for
modeling purposes, an impairment of US$500 million materializing in 4Q12.
Figure 6. TerniumEstimate Revisions, 2012E2014E (U.S. Dollars in Millions*)

Revenue
Op. Profit
EBITDA
EBITDA Margin
Net Income
EPADS

2012E
Previous Current
9,043
8,480
1,195
1,016
1,592
1,385
17.6%
16.3%
656
64
3.30
0.30

2013E
Change Previous Current
-6.2%
9,256
8,174
-15.0%
1,164
999
-13.0%
1,589
1,413
-127 bps 17.2%
17.3%
-90.3%
603
510
-90.3%
3.00
2.50

2014E
Change Previous Current
-11.7%
8,462
-14.2%
1,104
-11.1%
1,544
12 bps
18.3%
-15.4%
571
-15.4%
2.90

Change

*Except per share data. Sources: Company reports and Santander estimates.

VALUATION
Despite our conservative short-term outlook, we rate Ternium Buy based on its 35.5%
total-return potential, including a dividend yield of 3.8%, according to our DCF analysis for
TXs cash flow, and a value of US$518 million for TXs stake in Usiminas, as shown in
Figure 7. Our Buy threshold for TX is 27.6% based on the location of its installed capacities
in Argentina and Mexico and a weighted average of the respective country risk metrics.

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

Figure 7. TerniumDCF and WACC Estimates (U.S. Dollars in Millions*)

WACC Calculation

2013E

Risk free rate (U.S. 10-yr. yield)

2.0%

Country risk

5.2%

Expected return over risk free rate

5.5%

Beta

1.05

Cost of equity

13.0%

% equity

70%

Pre-tax cost of debt

8.0%

Cost of debt

5.2%

% debt

30%

WACC

10.7%

Perpetuity

2.5%

Discounted Cash Flow

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

Operating Income

1,104

1,217

1,193

1,249

1,279

1,238

1,234

1,250

1,302

1,310

(-) Taxes on Operating Income

-386

-426

-417

-437

-448

-433

-432

-438

-456

-458

(+) Depreciation

440

432

425

418

412

406

401

396

392

388

(+/-) Changes in Working Capital

-117

-95

-47

-85

-79

-28

-85

-63

-95

-61

(-) Capital Expenditures

-350

-350

-350

-350

-350

-350

-350

-350

-350

-350

(=) Free Cash Flow

691

779

802

795

814

832

768

795

793

828

Discount Factor

0.90

0.82

0.74

0.67

0.60

0.54

0.49

0.44

0.40

0.36

Discounted Free Cash Flow

624

636

592

530

490

453

378

353

319

300

(=) 2013E Year-End Value DCF

4,675

(+) Perpetuity (2.5%)

3,405

(-) Net Debt 2013E

2,321

(+) Stake in Usiminas

518

(-) Minority Interest

1,096

(=) Firm Value

8,598

(=) 2013E Year-End Equity

5,180

2013E Year-End Equity per ADS

$25.80

Sources: Company reports and Santander estimates.

However, on market valuation, we recognize that TX might be fairly valued. We

understand that TX should trade at a discount to its market peers, but finding the fair
discount is a delicate process. On one hand, multiples are around historical averages, the
discount is close to historical highs on a forward P/E basis, but with room to increase on
forward FV/EBITDA terms, according to market consensus. On the other hand, after the
nationalization of YPF in Argentina, investors perception of risk has increased discounts on
Argentine stocks to around 70-80% against LatAm peers, which should be translated in
discount to TX. If we consider TXs exposure in Argentina based on facilities location and
EBITDA generation, the discount should be 21-24% (30% share on 70-80% discount = 2124%) assuming no premium on Mexican facilities, which we think is conservative due to our
positive view on the Mexican steel market growth potential. However, if we adjust by
property stakes on EBITDA, the weight in Argentina is close to 50% (given that Siderar has
a 30% stake in TX Mexico); thus, the discount should be 35% given no premium/discount
on Mexico.

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

Based on our earnings estimates, TX is trading at 4.8x FV/EBITDA for 2013E while it
should reach 5.8x considering our target price.
Figure 8. Ternium Valuation vs. LatAm PeersFV/EBITDA
TX US

10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

Market Cap Weighted Average

Discount FV/EBITDA
80%
70%
60%
50%
40%
30%
20%
10%

J-12

J-12

A-11

O-10

M-11

M-10

J-09

D-09

F-09

S-08

A-08

J-07

N-07

J-07

A-06

M-06

S-11

M-12

S-10

M-11

M-10

S-09

S-08

M-09

S-07

M-08

M-07

M-06

S-06

0%

Figure 9. Ternium Valuation vs. LatAm PeersPE

TX US

18.0

Discount PE

60%

Market Cap Weighted Average

16.0

50%

14.0

40%

12.0

30%

10.0

20%

8.0

10%

6.0
4.0

0%

2.0

-10%

0.0

J-12

J-12

A-11

M-11

O-10

M-10

J-09

D-09

F-09

S-08

A-08

N-07

J-07

J-07

A-06

M-06

M-12

S-11

M-11

S-10

M-10

S-09

S-08

M-09

M-08

S-07

M-07

S-06

M-06

-20%

Source: Santander estimates based on Bloomberg consensus.

Figure 10. Industry Comps

Company

Stock
Price

Mkt
Cap

CSNA3

CSN

5.16

7,526

7.7

6.4

6.3

NM

8.3

7.9

GGBR4

Gerdau

9.45

15,123

8.8

7.6

7.3

16.4

14.3

13.9

USIM5

Usiminas

4.73

4,669

14.8

8.8

7.7

NM

42.6

21.9

10.4

7.6

7.1

16.4

21.7

14.6

Ticker
STEEL BRAZIL

EV/EBITDA
2012E

BRAZIL AVERAGE

P/E

2013E 2014E 2012E

2013E 2014E

STEEL - AMERICAS
X US

USSteel

21.16

3,053

5.4

4.0

3.3

16.6

6.9

5.1

TX

Ternium

19.60

3,869

4.9

4.8

4.4

61.7

7.7

6.9

NUE US

Nucor

39.31

12,479

8.9

6.2

5.0

21.7

12.0

9.4

STLD US

Steel Dynamics

12.29

2,694

6.9

5.1

4.5

14.2

8.4

6.4

CAP CI

CAP

35.89

5,363

7.3

6.6

5.5

13.0

12.0

10.1

ICHB MM

ICH

5.63

2,451

5.2

5.0

4.5

10.3

11.0

11.9

6.6

5.4

4.7

22.6

9.6

8.2

AMERICAS AVERAGE

NM: Not meaningful. Priced as of 9/7/12; all prices and estimates in US$. Sources: Santander estimates and Bloomberg consensus.

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

RISKS

10

Economic risk. Ternium is directly exposed to Mexican macroeconomic risk and indirectly
exposed to U.S. economic risk. If economic expectations fail to be met in the North
American region, the companys operations and profitability could be severely affected. On
the other hand, 30% of the companys EBITDA is generated in Argentina; although we
incorporated a conservative outlook on Argentina, worsening conditions could also affect
our target price for the stock.

Global steel prices. TX has integrated operations in Mexico and Argentina with particular
pricing powers in each region. However, a tougher-than-expected global economic
slowdown or disruption could affect global reference prices of steel; thus, TXs profitability
could be affected. In addition, the steel industry faces short term uncertainties regarding the
supply-demand balance. If oversupply holds in a demand slowing scenario, steel prices could
be affected more-than-expected.

Raw material prices. The recent drop in metal prices affected steel and raw materials used
by TX in production, which avoided further margin deterioration; if this trend changed with
steel prices falling more than raw material prices, TXs profitability would be hurt.

Political risk. We are not considering a scenario in which TXs facilities in Argentina
become nationalized, as happened with YPF early this year, as we think that such a
possibility is low. While we think the stock valuation fairly reflects that risk, if a takeover
were to occur, the stock price performance could be severely affected.

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

FINANCIAL STATEMENTS
Figure 11. TerniumIncome Statement, Balance Sheet, and Cash Flow Statement, 20092015E
(U.S. Dollars in Millions)
Income Statement
Net sales
Cost of sales
Gross profit
SG&A expenses
Other operating income, net
Operating income
EBITDA
Financial results
Goodwill
Equity income
Pretax profits
Income tax
Effective Tax Rate
Minority interest
Net income
Balance Sheet
Cash & cash equivalents
Trade receivables
Inventories
Other
Current Assets
Fixed assets
Non-Consolidated Companies
Other
Non Current Assets
Total Assets
Short-Term Debt
Trade payables
Other liabilities
Current Liabilities
Long-Term debt
Deferred income tax
Other liabilities
Non-Current Liabilities
Total Liabilities
Minority interest
Equity
Cash Flow Statements
Net income
Depreciation and amortization
Working Capital
Other
Operating Cash Flow
Capex and acquisitions
Divestments and Others
Investing Cash Flow
Change in debt
Dividends
Others
Financing Cash Flow
Net Change in Cash
Cash at Beginning
FX effect on cash/others
Cash at End

2009
4,959
(4,110)
849
(532)
(21)
296
681
92
469
1
858
(91)
0
(50)
717
2009
2,143
438
1,351
1,102
5,033
4,040
0
1,219
5,259
10,293
540
413
206
1,159
1,787
857
228
2,873
4,032
965
5,296
2009
717
385
635
(576)
1,162
(209)
1,000
791
(923)
0
0
(923)
1,030
1,156
43
2,143

2010
7,381
(5,665)
1,716
(665)
3
1,053
1,437
46
61
26
1,186
(407)
0
(157)
622
2010
2,628
664
1,953
278
5,523
4,263
0
1,327
5,589
11,112
513
588
454
1,556
1,427
878
236
2,541
4,096
1,135
5,881
2010
622
383
(448)
284
840
(417)
(53)
(470)
(520)
(100)
(33)
(654)
(284)
2,143
(769)
2,628

2011A
9,157
(7,094)
2,063
(786)
(12)
1,265
1,671
(312)
11
1
966
(315)
0
(136)
514
2011
2,441
735
2,137
241
5,554
4,033
0
1,149
5,182
10,736
1,042
678
251
1,971
949
749
237
1,935
3,906
1,085
5,745
2011
514
406
(400)
130
647
(602)
722
121
35
(147)
(252)
(365)
404
2,628
590
2,441

2012E
8,480
(6,662)
1,817
(807)
6
1,016
1,385
(101)
(505)
(5)
405
(301)
1
(40)
64
2012E
205
777
2,074
454
3,511
4,526
2,065
1,073
7,664
11,175
1,071
614
222
1,907
1,474
723
250
2,447
4,354
1,096
5,724
2012E
64
369
(184)
482
741
(3,230)
117
(3,113)
556
(147)
14
422
(1,950)
2,441
286
205

2013E
8,174
(6,374)
1,800
(801)
0
999
1,413
(105)
0
0
894
(295)
0
(89)
510
2013E
324
761
2,096
459
3,639
4,812
1,560
1,008
7,379
11,018
1,071
524
212
1,807
1,574
736
238
2,548
4,355
1,096
5,567
2013E
510
414
(165)
109
868
(700)
0
(700)
100
(150)
0
(50)
118
205
0
324

2014E
8,462
(6,549)
1,913
(804)
0
1,109
1,549
(102)
0
0
1,007
(332)
0
(101)
574
2014E
740
788
2,189
463
4,180
4,721
1,560
947
7,228
11,408
1,071
538
219
1,828
1,474
730
240
2,444
4,272
1,096
6,040
2014E
574
440
(116)
121
1,019
(350)
0
(350)
(100)
(153)
0
(253)
416
324
0
740

2015E
8,660
(6,674)
1,985
(823)
0
1,163
1,595
(69)
0
0
1,094
(361)
0
(109)
623
2015E
1,109
807
2,267
468
4,651
4,639
1,560
890
7,089
11,740
971
549
220
1,739
1,374
733
241
2,348
4,088
1,096
6,556
2015E
623
432
(94)
129
1,091
(350)
0
(350)
(200)
(172)
0
(372)
369
740
0
1,109

Sources: Company reports and Santander estimates.

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

11

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

IMPORTANT DISCLOSURES
Ternium12-Month Relative Performance (U.S. Dollars)
140
120

MSCI

100
80
Ternium

60
40
20
0
S-11

N-11

J-12

M-12

M-12

J-12

S-12

Sources: Bloomberg and Santander.

TerniumThree-Year Stock Performance (U.S. Dollars)

45.00

5000

40.00

4500

35.00

4000
3500

30.00

3000

25.00
B $50.00
6/14/10

20.00
15.00
B $25.00
7/6/09

10.00
5.00
0.00
J-09

B $47.00
12/13/10

Analyst Recommendations
and Price Objectives
B: Buy
H: Hold
UP: Underperform
UR: Under Review

2500
2000
1500

B $40.00
12/8/09

1000

B $32.10
12/12/11

500
0

S-09 D-09 M-10

J-10

Ternium ( L Axis)

S-10 D-10 M-11

J-11

S-11 D-11 M-12

J-12

MXLA

Source: Santander.

12

Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

IMPORTANT DISCLOSURES
Key to Investment Codes

Definition
Expected to outperform the local market benchmark by more than 10%.
Expected to perform within a range of 0% to 10% above the local market
benchmark.
Underperform/Sell Expected to underperform the local market benchmark.
Under review

Rating
Buy
Hold

% of
Companies
Covered with This
Rating
54.46%

% of Companies Provided
Investment Banking
Services in the Past 12
Months
19.67%

32.14%
12.95%
0.45%

12.50%
6.90%
--

The numbers above reflect our Latin American universe as of Friday, August 24, 2012.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving
these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other
electronic systems.
Target prices are 2012 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price
appreciation + prospective dividend yield) unless otherwise specified.
Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment
rd
th
Securities Inc., 45 East 53 Street, 17 Floor (Attn: Research Disclosures), New York, NY 10022 USA.
Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above
methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the
report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American
equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included
in the body of this report.
The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk
premium, unless otherwise specified. The benchmark plus the 10.0% differential used to determine the rating is time adjusted to make it comparable
with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) 350 3974.
This research report (report) has been prepared by Santander Investment Securities Inc. ("SIS"; SIS is a subsidiary of Santander Investment I, S.A.
which is wholly owned by Banco Santander, S.A. ["Santander"]) on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for
information purposes only. This report must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities
mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the
recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the
content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report
is issued in Spain by Santander Investment Bolsa, Sociedad de Valores, S.A. (Santander Investment Bolsa) and in the United Kingdom by Banco
Santander, S.A., London Branch. Santander London is authorized by the Bank of Spain. This report is not being issued to private customers. SIS,
Santander London and Santander Investment Bolsa are members of Grupo Santander.
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that
their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous
manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation
in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo
Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income
arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Walter Chiarvesio*, Eugenia Fernandez
Pouchan *.
*Employed by a non-US affiliate of Santander Investment Securities Inc. and not registered/qualified as a research analyst under FINRA rules, and is not
an associated person of the member firm, and, therefore, may not be subject to the FINRA Rule 2711 and Incorporated NYSE Rule 472 restrictions on
communications with a subject company, public appearances, and trading securities held by a research analyst account.
Grupo Santander receives non-investment banking revenue from Usiminas, Gerdau, CAP, ICH.
Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Gerdau.
Within the past 12 months, Grupo Santander has received compensation for investment banking services from Gerdau, CAP, CSN, Ternium.
In the next three months, Grupo Santander expects to receive or intends to seek compensation for investment banking services from CAP, Ternium.
The information contained within this report has been compiled from sources believed to be reliable. Although all reasonable care has been taken to
ensure the information contained within these reports is not untrue or misleading, we make no representation that such information is accurate or
complete and it should not be relied upon as such. All opinions and estimates included within this report constitute our judgment as of the date of the
report and are subject to change without notice.
From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly
interested in, the securities, options, rights or warrants of companies mentioned herein.
Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any
transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the
foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this
report and its dissemination in the United States.
2012 by Santander Investment Securities Inc. All Rights Reserved.

2012