Strong FCF, three free options and potential to double – upgrade to Buy

Deutsche Bank Markets Research Rating Buy Europe Luxembourg Steel Steel Company ArcelorMittal Date 12 July 2017 Recommendation Change Strong FCF, three free options and potential to double – upgrade to Buy Reuters Bloomberg Exchange Ticker MT.AS MT NA EOE MT Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E EBITDA (USDm) 5,231 6,255 7,874 7,662 8,538 DB EPS (USD) -10.41 0.99 2.76 2.38 3.01 % Change -0.0% 0.0% 9.7% 20.0% 26.5% EV/EBITDA (x) 6.5 5.2 5.1 5.0 4.3 DPS (USD) 0.00 0.00 0.30 0.40 1.00 Source: Deutsche Bank estimates, company data Attractive valuation and cash yield as cyclical upside underappreciated - Buy ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Price at 11 Jul 2017 (EUR) 20.90 Price Target (EUR) 28.00 52-week range (EUR) 26.30 - 14.75 Bastian Synagowitz Research Analyst (+41) 44 227-3377 bastian.synagowitz@db.com Key changes Rating Hold to Buy ↑ Target Price 23.00 to 28.00 ↑ 21.7% Source: Deutsche Bank Price/price relative 481216202428327/141/157/151/167/161/17ArcelorMittalDJ (.STOXXE) (Rebased) Performance (%) 1m 3m 12m Absolute 10.0 -7.1 47.6 DJ (.STOXXE) -3.0 1.1 21.4 Source: Deutsche Bank We have been on the sidelines on MT to avoid the risks stemming from an iron ore price correction, and the shares have underperformed European carbon steel peers by 13ppts since the start of 2017. Nevertheless, we believe the stock is now priced for a “bearish” USD6bn EBITDA scenario in 2018 despite structural changes having reduced downside risks (B/S as well as cyclical risks) and cycle tailwinds skewing earnings risk to the upside for 2017 and after. In our view, the stock comes with three free options and could possibly double from here. We also expect strong cash generation (adj. 7-12% FCF yield) to halve net debt by 2019 and provide scope for significant cash returns – Buy. Stock is priced for USD6bn EBITDA but cyclical risks are skewed to the upside We lift EBITDA by 1-13% for 2017-19E (broadly in line with the street). However, spot conditions remain significantly stronger than our base case scenario (DB 2018E at USD7.7bn vs. spot at c.USD11bn) and several structural changes (consolidation, trade protection, China supply side reform) suggest that strong conditions may actually last. At just 5.0x EV/EBITDA 2018E (vs. carbon steel peers at 6.4x), we believe the stock is priced for a USD6bn EBITDA scenario and comes with three free options: 1) a stronger cycle in Western core markets, 2) a Brazilian recovery, and 3) a possible rebound in iron ore prices. If these play out, they could take EBITDA to USD12bn (implying 26% FCF yield) and our price target to USD49. Q2 preview on page 14. Three structural changes favor MT We note three changes supporting the markets in which MT operates. Our base case is that these limit the downside risks; however, they also have the potential to drive a “second leg” steel recovery. Firstly, 2017 may see the largest M&A activity in Europe since 2006 as the four largest players may merge together (MT/Ilva and Thyssen/Tata). Although our base assumption is that pricing power will only change little, it should support a more robust price environment. Secondly, trade policy continues to become stricter in MT ́s US and European core markets. Lastly, China has kicked off a 10-20% capacity curtailment program and both DB ́s Chinese steel team as well as strong Chinese margins support the view that this is actually happening. Price target lifted to E28, 5.0x EV/EBITDA attractive vs peers at 6.4x; risks We use an equal blend of forward EBITDA (6.0x 2018E) and DCF (7.9% WACC, 1.1 beta, 6.5% market risk premium, 2.5% risk-free rate, 2% terminal growth to reflect limited industry growth prospects). Key downside risks: macro, trade regulation, steel prices, raw material costs, project development, and FX rates. Distributed on: 12/07/2017 16:00:00 GMT0bed7b6cf11c 12 July 2017 Steel ArcelorMittal Page 2 Deutsche Bank AG/London Model updated:12 July 2017 Running the numbers Europe Luxembourg Steel ArcelorMittal Reuters: MT.AS Bloomberg: MT NA Buy Price (11 Jul 17) EUR 20.90 Target Price EUR 28.00 52 Week range EUR 14.75 - 26.30 Market Cap (m) EURm 21,318 USDm 24,341 Company Profile ArcelorMittal is the globa