July 28,2006 China: Metals & Mining Goldman Sachs Global Investment Research 1 July 28,2006 China: Metals & Mining Macro headwinds highlight defensive names Industry context - potential further macro tightening We believe the risk of another round of macro tightening, using harsh administrative measures, has increased. Premier Wen Jiabao, in his recent speech, commented on the need to curb strong investment growth. Measures proposed are very similar to those used in the 2004 round of tightening: land control, bank lending curb, and re-evaluation of new investment projects. Lessons from 2004 tightening - focusing on defensive names We believe this is incrementally negative for the commodity sector. Analyzing the 2004 experience, we find three key driving factors for sector performance on a three, six, and twelve month basis: Supply side tightness: (1). Sectors with tight supply in 2004, such as copper and coal, were least affected, as shown in Exhibit 1. The volume ramp up in steel and cement sectors caused both physical and equity underperformance. (2). Sectors with forward deteriorating supply: alumina/aluminum, and thermal coal. (3). Sectors with forward tight supply forecast: copper, long product steel, and cement. Company volume growth strength. (1). We believe Jiangxi Copper (JXC)’s 2004 21% yoy volume growth is also a key factor for its 119% yoy earnings growth and outperformance. (2). Companies with strong volume growth in 2007: Angang, Maanshan Iron & Steel (Magang) and Shenhua Energy (Shenhua). (3). Companies with single digit volume growth in 2007: Chalco, JXC, Yanzhou Coal (YCM), and Anhui Conch (Conch) Valuation support. (1). We believe sectors at the trough would be more resilient, potentially factoring in the majority of the bad news. (2). Companies at trough valuation: Magang, Baosteel, Wuhan Iron & Steel, CNBM, and YCM. (3). Companies around mid-cycle valuation: JXC, Angang, Chalco, Conch, and Shenhua. Best buy idea We like Jiangxi Copper due to its global tight supply, demand visibility from China’s power grid de-bottlenecking, and mid-cycle valuation. New data points continue to point to supply restraints: Grasberg production guidance cut by 50Kt, Newmont’s 46Kt Batu Hijau mine volume cut. Year to date, major producers have lowered their 2006 production guidance by 518Kt, or 3% of global supply. Best sell idea We have downgraded Chalco to Sell from Neutral due to tangible, quick, and large non-Chalco alumina capacity additions. For details, please refer to report titled: “Chalco: Losing out to non-Chalco alumina entrants” published on July 27,2006. Song Shen +852-2978-1131 | email@example.com Goldman Sachs (Asia) L.L.C. David Pow +852-2978-1276 | firstname.lastname@example.org Goldman Sachs (Asia) L.L.C. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam. The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the text preceding the disclosures. For other important disclosures go to /research/hedge.html. The Goldman Sachs Group, Inc. Global Investment Research July 28,2006 China: Metals & Mining Goldman Sachs Global Investment Research 2 Exhibit 1: Supply tightness is one of the key factor amid demand headwinds Key share price and underlying commodity performance during 2004 tightening Stock Name Ticker 3M 6M 12M 2006E 2007E Chalco 2600.HKPhysical Aluminum -2% 5% 13% 16% 8% Alumina -27% -20% -6% Share Performance Absolute -33% -20% -28% Relative -26% -20% -32% Jiangxi Copper 0358.HKPhysical Copper -13% 0% 10% 3% 4% Share Performance Absolute -13% 14% 3% Relative -5% 13% 0% Yanzhou Coal 1171.HKPhysical Spot Coal-Shanxi mixed 26% 27% 30% 6% 8% Share Performance Absolute 0% 19% 25% Relative 8% 19% 22% Angang 0347.HKPhysical Hot rolled -14% -2% 15% 135% 14% Share Performance Absolute -32% -9% 13% Relative -24% -9% 10% Magang 0323.HKPhysical Rebar -16% -10% -2% 5% 23% Share Performance Absolute -19% 11% -11% Relative -11% 11% -15% Anhui Conch 0914.HKPhysical Cement -16% -19% -27% 27% 8% Share Performance Absolute -32% -12% 3% Relative -24% -13% -1% (1).04 capex growth strong; (2). 06 & 07 evidence of sharper reduction of excess capacity (1).04 suffered from 03 over investment; (2).06 & 07 evidence of tighter supply (1) 04 alumina supply still tight; (2) 06 & 07 tangible large increase (1) 04 supply got tighter; (2).06 & 07 get even tighter due to 7-10 year greenfield lead time (1).04 coal shortage; (2).06 & 07 volume ramp, upcycle from 04 & 05 capex cycle (1).04 capex growth at 34%; (2). 06 & 07 capex growth around 10- 15%; Supply DynamicsPost April 04 performance Company Volume growth yoy % Source: Bloomberg, Company data, Goldman Sachs Research Estimates. Exhibit 2: Stocks at trough valuation should provide downside support Current valuation vs. mid-cycle and trough levels Jiangxi Yanzhou Anhui Chalco Copper Coal Shenhua Conch Angang Magang Baosteel Wugang Valuation metrics P/B (x) P/B (x) P/E (x) P/E (x) EV/t (Rmb/t) P/B (x) P/B (x) P/B (x) P/B (x) Current 2006E 188.8.131.523.64041.20.80.91.0 Current 2007E 1.21.510.412.73471.00.60.80.9 Mid-cycle value 1.51.48.012.03601.21.11.11.0 Trough value 1.10.86.09.02800.70.80.90.9 Target price HK$ 4.0 HK$ 10.3 HK$ 4.16 HK$ 13.2 HK$ 14.5 HK$ 7.2 HK$ 4.25 Rmb 6.0 Rmb 3.0 Potential upside to target price -27% 40% -22% -6% 11% 19% 74% 43% 13% Commodity price outlook ranking Low High Low Low Medium Medium Medium Medium Medium Source: Bloomberg, Company data, Goldman Sachs Research Estimates. July 28,2006 China: Metals & Mining Goldman Sachs Global Investment Research 3 Exhibit 3: China commodity names have generally corrected below mid-cycle Valuation comp GS 7/26/2006 Upside to Mkt cap Ticker rating Price Currency target price (US$mn) 2006E 2007E 2006E 2007E 2006E 2007E 2006E 2007E 2006E 2007E 2006E 2007E 2006E 2007E Chalco 2600.HKSell 5.33 HKD -25% 7,5725.311.01.41.23.45.133% 25% 27% 11% 14% 7% 6% 3% At target price 4.00 HKD 7.014.61.91.72.63.933% 25% 27% 11% 14% 7% 8% 4% Jiangxi Copper 0358.HKBuy 7.34 HKD 40% 2,73184.108.40.206.55.36.524% 22% 34% 26% 19% 23% 8% 7% At target price 10.30 HKD 220.127.116.11.17.28.824% 22% 34% 26% 19% 23% 5% 5% Yanzhou Coal 1171.HKSell 5.36 HKD -22% 3,3909.910.41.31.23.73.345% 42% 14% 11% -41% -50% 3% 3% At target price 4.16 HKD 7.68.01.00.92.52.145% 42% 14% 11% -41% -50% 4% 4% Shenhua 1088.HKNeutral 14.00 HKD -6% 32,56213.618.104.22.168.37.258% 56% 28% 24% 57% 36% 3% 3% At target price 13.20 HKD 12.822.214.171.124.96.858% 56% 28% 24% 57% 36% 3% 3% Angang 0347.HKNeutral 6.04 HKD 19% 4,6075.24.51.21.03.72.828% 27% 23% 23% 59% 31% 10% 11% At target price 7.20 HKD 126.96.36.199.24.23.228% 27% 23% 23% 59% 31% 8% 9% Maanshan Iron and Steel 0323.HKBuy 2.44 HKD 74% 2,0255.93.10.80.65.13.418% 23% 13% 20% 75% 73% 6% 12% At target price 4.25 HKD 10.35.41.41.17.04.618% 23% 13% 20% 75% 73% 3% 7% Baosteel 600019.SSBuy 4.20 CNY 43% 9,2096.55.90.90.82.82.624% 24% 14% 14% 13% 13% 8% 8% At target price 6.00 CNY 188.8.131.52.23.83.624% 24% 14% 14% 13% 13% 5% 5% Wuhan Iron and Steel 600005.SSNeutral 2.66 CNY 13% 2,6105.95.41.00.93.33.319% 19% 17% 16% 19% 27% 8% 9% At target price 3.01 CNY 184.108.40.206.03.73.619% 19% 17% 16% 19% 27% 7% 8% Anhui Conch 0914.HKNeutral 13.05 HKD 11% 2,10718.3220.127.116.11.45.925% 29% 14% 16% 131% 124% 1% 1% At target price 14.50 HKD 20.315.02.92.47.96.325% 29% 14% 16% 131% 124% 1% 1% CNBM 3323.HKBuy 2.63 HKD 33% 7018.104.22.168.27.65.519% 20% 13% 14% 101% 92% 2% 2% At target price 3.50 HKD 14.522.214.171.124.06.619% 20% 13% 14% 101% 92% 1% 2% HShare Index 12.211.32.01.85.55.1 N/AN/A 18% 17% N/AN/A 3% 3% P/E (X) P/B (X) EV/EBITDA (X) EBITDA mgn ROEDividend yieldGearing All target prices are 12 months.Target prices based on the following: For Yanzhou Coal and Shenhua:P/E; for Anhui Conch: EV/tonne; for CNBM: SOTP; all others based on P/B. Key risk: unexpected macro swing. Source: Bloomberg, Company data, Goldman Sachs Research Estimates. July 28,2006 China: Metals & Mining Goldman Sachs Global Investment Research 4 RegAC I, Song Shen, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. Disclosures Coverage group(s) of stocks by primary analyst(s) Song Shen: Asia Commodities Companies. Asia Commodities Companies: Aluminum Corporation of China, Angang New Steel, Anhui Conch Cement, Baoshan Iron & Steel, China National Building Material, China Shenhua Energy, Jiangxi Copper, Maanshan Iron & Steel, Wuhan Iron and Steel, Yanzhou Coal Mining. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. There are no company-specific disclosures. Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 27% 59% 14% 57% 49% 45% As of July 1,2006, Goldman Sachs Global Investment Research had investment ratings on 2,129 equity securities. Prior to June 24,2006, Goldman Sachs utilized a relative rating system of Outperform, In-Line and Underperform, which, for the purposes of the above disclosure required by NASD/NYSE rules, equated to Buy, Hold and Sell. As of June 24,2006, Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure. See 'Ratings, Coverage groups and views and related definitions' below. Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co- managed public offerings in prior periods; directorships; market making and/or specialist role. July 28,2006 China: Metals & Mining Goldman Sachs Global Investment Research 5 The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at . Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. Japan: See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at . The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Ratings, coverage views and related definitions prior to June 26,2006 Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary analyst, stock and coverage group at . Definitions Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months. Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. July 28,2006 China: Metals & Mining Goldman Sachs Global Investment Research 6 Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months. We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the CIL will automatically come off the list after 90 days unless renewed by the covering analyst and the relevant Regional Investment Review Committee. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN 21006797897) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Germany by Goldman Sachs & Co. oHG; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in Japan by Goldman Sachs (Japan) Ltd; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International, authorised and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman, Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also be distributing research in Germany. General disclosures in addition to specific disclosures required by certain jurisdictions This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than some industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Current options disclosure documents are available from Goldman Sachs sales representatives or at or from Research Compliance, One New York Plaza, New York, NY 10004. Copyright 2006 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.