ab Global Equity Research Americas Steel UBS Investment Research 12-month rating Neutral * First Read: United States Steel Unchanged 12m price target US$57.00 Unchanged Solid Volume in Q4; Profits Unlikely in Q1 Price US$54.44 Clean EPS in line with our view and volumes surprisingly robust RIC: X.N BBG: X US X posted a Q4 EPS loss of -$1.74, or $1.22 excluding 1x items, similar to UBSe 25 January 2011 $1.25 loss and below consensus $1.12 loss. One–time items included $0.07/shr gain from asset sales, a $0.23 FX hit, and a $0.36 tax rate hit. Sheet EBIT was Trading data better than expected at -$156M vs UBSe -$210M with volumes surprisingly strong 52-wk range US$69.71-37.66 at 3.86M tons from Q3’s 3.8M and Q409’s 3.2M but FRP costs averaged $697/t. Market cap. US$7.82bn Shares o/s 144m (COM) Outlook suggests Q1 too soon to return to profit Free float 97% Mgmt guided to “modest improvement” in Q1 vs Q4, which suggests UBSe $0.10 Avg. daily volume (000) 1,997 and consensus $0.27 look high. Flat-rolled should benefit from fewer outage costs, Avg. daily value (m) US$102.7 but still a $40M/qtr hit from keeping Hamilton off line. X notes a lag in some of its pricing will mean recent hikes benefit more in Q2. Tubular was seen still profitable Balance sheet data 12/10E but lagging in passing through higher costs. Also hurting Q1 will be higher pension Shareholders equity US$4.33bn and OPEB costs for I/S impact rising to $590M in 2011 vs $428M in 2010. P/BV (UBS) 1.8x Cash flow challenges concern Net Cash (debt) (US$2.95bn) In 2010 X said FCF after dividends was a $991M use or -$6.90/shr, and in 2011 we Forecast returns see a $3.60/shr FCF drain as capex rises to ~$1B from 2010’s $676M and pension Forecast price appreciation +4.7% costs rise. We think X may need to tap the debt mkt in H1 for $300-$500M. Forecast dividend yield 0.4% Valuation: Maintaining $57 price target, conf call at 3PM Forecast stock return +5.1% Our $57 price target uses an 8x 2012E discounted EV/EBITDA up from the Market return assumption 5.6% through-the-cycle 5.8x. We think a rising price environment will lead investors to Forecast excess return -0.5% pay a higher multiple on forward earnings. While consensus ests look high, X earnings will be highly levered to sheet prices given iron ore vertical integration. EPS (UBS, US$) 12/10E 12/09 UBS Cons. Actual Q1 (0.73) (0.73) (3.84) Q2 0.45 0.45 (3.28) Q3 (1.21) (1.20) (2.43) Highlights (US$m) 12/08 12/09 12/10E 12/11E 12/12E Q4E (1.25) (1.12) (1.86) Revenues 23,817.00 11,048.00 17,169.90 19,883.25 20,462.52 12/10E (2.74) (2.56) EBIT (UBS) 3,096.00 (1,684.00) (162.85) 661.88 1,225.58 12/11E 1.55 3.46 Net Income (UBS) 2,031.84 (1,502.85) (393.85) 298.74 640.29 EPS (UBS, US$) 17.24 (11.18) (2.74) 1.55 3.19 Performance (US$) Net DPS (UBS, US$) 1.10 0.45 0.20 0.20 0.20 250 Stock Price (US$) Rel. S & P 500 200 Profitability & Valuation 5-yr hist av. 12/09 12/10E 12/11E 12/12E 200 150 EBIT margin % 10.6 -15.2 -0.9 3.3 6.0 150 100 ROIC (EBIT) % 47.5 (25.5) (2.5) 9.3 15.1 100 50 EV/EBITDA (core) x 4.8 -10.4 27.1 10.6 7.7 50 PE (UBS) x 7.2 NM NM 35.2 17.1 0 0 01/08 04/08 07/08 10/08 01/09 04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 Net dividend yield % 0.8 1.2 0.4 0.4 0.4 Price Target (US$) (LHS) Stock Price (US$) (LHS) Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for Rel. S & P 500 (RHS) abnormal and economic items at the analysts judgement. Source: UBS Valuations: based on an average share price that year, (E): based on a share price of US$54.44 on 25 Jan 2011 09:12 EST www.ubs.com/investmentresearch Timna Tanners Analyst email@example.com +1-212-713 2927 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 4. * Exception to core rating bands; See page6 UBS 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.
Global Equity ResearchAmericasSteel United States Steel Corp12-month rating Neutral *12m price target US$57.00 Valuation (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E P/E (local GAAP) 7.2 6.1 NM NM 35.2 17.1 P/E (UBS) 7.2 6.4 NM NM 35.2 17.1 P/CEPS 4.7 4.9 NM 30.2 8.2 6.0 Net dividend yield (%) 0.8 1.0 1.2 0.4 0.4 0.4Company profile P/BV 1.9 2.7 1.1 1.8 1.7 1.5US Steel is one of the largest integrated steel producers in North EV/revenue (core) 0.7 0.8 1.0 0.8 0.7 0.7America. Through its subsidiary, USSE in Slovakia and Serbia, it is EV/EBITDA (core) 4.8 5.1 -10.4 27.1 10.6 7.7one of the largest integrated flat-rolled steel producers in Central EV/EBIT (core) 6.1 6.1 NM NM 21.2 11.9Europe. Annual production capacity is about 31.7m tons globally, with EV/OpFCF (core) 5.4 5.4 NM NM 12.4 8.624.3m in the US. In 2003, US Steel acquired National Steel out of EV/op. invested capital 2.9 2.7 1.6 2.0 2.0 1.8bankruptcy, and in 2007 it bought pipe maker Lone Star andCanadas Stelco. Its flat-rolled steel is sold primarily to automotive, Enterprise value (US$m) 12/08 12/09 12/10E 12/11E 12/12Econstruction, and appliance industries, and it also produces tin and Average market cap 13,094.98 4,663.44 7,820.85 7,820.85 7,820.85tubular steel. It owns iron ore mines in the US. + minority interests 136.25 262.25 1.00 1.00 1.00 + average net debt (cash) 2,139.50 2,139.50 2,547.16 3,295.68 3,900.58 + pension obligations and other 3,582.60 3,582.60 3,582.60 3,582.60 3,582.60 - non-core asset value 0.00 0.00 (674.00) (674.00) (674.00) Core enterprise value 18,953.33 10,647.79 13,277.61 14,026.13 14,631.03 Growth (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EValue (EV/OpFCF & P/E) Revenue 14.3 41.2 -53.6 55.4 15.8 2.9 14.0x 30.0x EBITDA (UBS) 17.1 115.3 - - 169.7 43.0 12.0x EBIT (UBS) 18.2 155.2 - -90.3 - 85.2 20.0x 10.0x EPS (UBS) 9.8 125.9 - -75.5 - 114.3 10.0x 8.0x Cash EPS 8.5 88.2 - - NM 36.1 6.0x 0.0x Net DPS 53.1 37.5 -59.1 -55.6 0.0 0.0 4.0x -10.0x BVPS 8.0 -10.8 -21.5 -7.5 6.2 13.3 2.0x 0.0x -20.0x 12/08 12/09 12/10 12/11E 12/12E Margins (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E EV/OpFCF (LHS) P/E (RHS) EBITDA / revenue 13.4 15.5 NM 2.9 6.6 9.2 EBIT / revenue 10.6 13.0 -15.2 -0.9 3.3 6.0 Net profit (UBS) / revenue 7.3 8.5 NM NM 1.5 3.1Profitability 15.0% 60% Return on capital (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E 10.0% 40% EBIT ROIC (UBS) 47.5 44.8 NM NM 9.3 15.1 5.0% ROIC post tax - 32.1 NM NM 6.5 9.9 0.0% 20% Net ROE 31.9 39.0 (31.4) (8.7) 6.7 13.0 -5.0% 0% -10.0% -20% Coverage ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E -15.0% -20.0% -40% EBIT / net interest 23.2 NM - - 2.8 5.0 12/08 12/09 12/10(E) 12/11(E) 12/12(E) Dividend cover (UBS EPS) 25.2 15.8 - - 10.4 22.3 EBIT margin (LHS) ROIC (RHS) Div. payout ratio (%, UBS EPS) 5.6 6.3 - - 9.6 4.5 Net debt / EBITDA 0.5 0.7 NM 6.0 2.8 2.2ROE v Price to book value Efficiency ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E 40.0% 3.0x Revenue / op. invested capital 4.4 3.4 1.7 2.6 2.8 2.5 20.0% 2.5x Revenue / fixed assets 3.5 3.6 1.6 2.6 3.0 3.0 2.0x Revenue / net working capital 14.4 12.0 5.9 10.6 10.0 8.6 0.0% 1.5x Investment ratios (x) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12E -20.0% 1.0x OpFCF / EBIT 1.1 1.1 0.7 NM 1.7 1.4 -40.0% 0.5x Capex / revenue (%) 4.1 3.8 4.3 3.8 4.9 4.9 12/08 12/09 12/10(E) 12/11(E) 12/12(E) ROE (LHS) Price to book value (RHS) Capex / depreciation 1.5 1.5 0.7 1.0 1.5 1.5 Capital structure (%) 5Yr Avg 12/08 12/09 12/10E 12/11E 12/12EGrowth (UBS EPS) Net debt / total equity 21.4 51.2 49.1 68.1 79.2 79.8 Net debt / (net debt + equity) 19.5 33.1 31.5 40.5 44.2 44.4 25000 150% Net debt (core) / EV 8.06 11.3 20.1 19.2 23.5 26.7 100% Source: Company accounts, UBS estimates. (UBS) valuations are stated before goodwill-related charges and other adjustments for abnormal and economic 20000 50% items at the analysts judgement. 15000 Valuations: based on an average share price that year, (E): based on a share price of US$54.44 on 25 Jan 2011 09:12 EST Market cap(E) may include 0% forecast share issues/buybacks. 10000 -50% 5000 -100% 12/08 12/09 12/10(E) 12/11(E) 12/12(E) Timna Tanners Revenue (LHS) UBS EPS Growth (RHS) Analyst firstname.lastname@example.org +1-212-713 2927* Exception to core rating bands; See page6 UBS 3
First Read: United States Steel 25 January 2011 United States Steel CorpUS Steel is one of the largest integrated steel producers in North America.Through its subsidiary, USSE in Slovakia and Serbia, it is one of the largestintegrated flat-rolled steel producers in Central Europe. Annual productioncapacity is about 31.7m tons globally, with 24.3m in the US. In 2003, US Steelacquired National Steel out of bankruptcy, and in 2007 it bought pipe makerLone Star and Canadas Stelco. Its flat-rolled steel is sold primarily toautomotive, construction, and appliance industries, and it also produces tin andtubular steel. It owns iron ore mines in the US. Statement of RiskThe potential risks in the metals sector include but are not limited to: the volatilenature of raw materials and finished product prices; trade flows of raw materialsand finished products; and operational difficulties, including weather and otheruncontrollable logistics troubles. U.S. Steel’s pension and healthcareunderfunded liability position approximated $4.6B as of the latest company-issued information. U.S. Steel in particular is exposed to the automotive industryand onshore energy drilling activity, coal costs, and steel imports. Analyst CertificationEach research analyst primarily responsible for the content of this researchreport, in whole or in part, certifies that with respect to each security or issuerthat the analyst covered in this report: (1) all of the views expressed accuratelyreflect his or her personal views about those securities or issuers; and (2) no partof his or her compensation was, is, or will be, directly or indirectly, related tothe specific recommendations or views expressed by that research analyst in theresearch report. UBS 4
First Read: United States Steel 25 January 2011Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches andaffiliates are referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission.UBS Investment Research: Global Equity Rating Allocations 1 2 UBS 12-Month Rating Rating Category Coverage IB Services Buy Buy 49% 40% Neutral Hold/Neutral 42% 35% Sell Sell 8% 21% 3 4 UBS Short-Term Rating Rating Category Coverage IB Services Buy Buy less than 1% 14% Sell Sell less than 1% 0%1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided withinthe past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were providedwithin the past 12 months.Source: UBS. Rating allocations are as of 31 December 2010.UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 5
First Read: United States Steel 25 January 2011KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not aforecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stocks price target and/or rating aresubject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect anychange in the fundamental view or investment case.Equity Price Targets have an investment horizon of 12 months.EXCEPTIONS AND SPECIAL CASESUK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell:Negative on factors such as structure, management, performance record, discount.Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment ReviewCommittee (IRC). Factors considered by the IRC include the stocks volatility and the credit spread of the respective companysdebt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are notregistered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained inthe NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by aresearch analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,follows.UBS Securities LLC: Timna Tanners.Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date 2, 4, 6, 13, 16, United States Steel Corp 20, 22 X.N Neutral (CBE) N/A US$54.44 24 Jan 2011Source: UBS. All prices as of local market close.Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricingdate2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. UBS 6
First Read: United States Steel 25 January 2011United States Steel Corp (US$) Price Target (US$) Stock Price (US$) 250 200 150 100 50 0 01-Jan-06 01-Jan-07 01-Jan-08 01-Jan-09 01-Jan-10 01-Jan-11 01-Apr-06 01-Jul-06 01-Oct-06 01-Apr-07 01-Jul-07 01-Oct-07 01-Apr-08 01-Jul-08 01-Oct-08 01-Apr-09 01-Jul-09 01-Oct-09 01-Apr-10 01-Jul-10 01-Oct-10 Buy 2 Neutral 2 Reduce 2 Buy Neutral Sell No Rating Short-term BuySource: UBS; as of 24 Jan 2011Note: On August 4, 2007 UBS revised its rating system. (See UBS Investment Research: Global Equity Rating Definitions tablefor details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6%above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 =FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA,lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6%below the MRA, lower degree of predictability. The predictability level indicates an analysts conviction in the FSR. Apredictability level of 1 means that the analysts estimate of FSR is in the middle of a narrower, or smaller, range of possibilities.A predictability level of 2 means that the analysts estimate of FSR is in the middle of a broader, or larger, range of possibilities.From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%. UBS 7