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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.

Latin American Equity Research Company Report

Buenos Aires, September 11, 2012 LatAmMetal and Mining

TERNIUM BUYSolid Fundamentals to Outweigh Short-Term Uncertainty Walter Chiarvesio* Eugenia Fernandez Pouchan*Santander Rio Sociedad de Bolsa S.A. Santander Rio Sociedad de Bolsa S.A.+5411 4341-1564 +5411 [email protected] [email protected]

(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 TX52-Week Range (US$) 15.10-25.402013E P/E Rel to the MSCI LatAm (x) 0.72013E P/E Rel to M&M (x) 0.9MSCI (points) 3,633.03-Yr EBITDA CAGR (12-15E) 6.0%Market Capitalization (US$ Mn) 3,922.0Float (%) 24.43-Mth Avg Daily Vol (US$ Mn)) 9.7Shares Outst Mn (ADS: 10:1) 200.5Net Debt/Equity (x) 0.4Book Value per ADS (US$) 28.1

Estimates and Valuation Ratios 2011 2012E 2013E 2014E Net Earn (Local Mn) NA NA NA NA Current EPS NA NA NA NA Net Earn (US$ Mn) 514 64 510 571 Current EPADS 2.6 0.3 2.5 2.9 P/E (x) 7.6 61.7 7.7 6.9 P/Sales (x) 0.4 0.5 0.5 0.5 P/CE (x) 4.3 8.9 4.2 3.9 FV/EBITDA (x) 4.0 4.9 4.8 4.4 FV/Sales (x) 0.7 0.8 0.8 0.8 FCF Yield (%) 1.2 -6.3 4.3 16.9 Div per ADS (US$) 0.73 0.73 0.75 0.76 Div Yield (%) 3.7 3.7 3.8 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.

Ternium: Solid Fundamentals to Outweigh Short-Term Uncertainty

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.

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.


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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 Concerns

70% of Installed capacity located in Mexico, on which we have a positive economic outlook.

Expansion capacity focused in downstream value-added 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.

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.

Uncertain outlook of global and U.S. steel prices. Sector cyclicality in current uncertain global

economic environment.

Slowing growth and tighter margins in South America.

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.



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

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)

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

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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*

*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

2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E

CAGR 2012-2015

Sales Volume (Mn tonne) 8.17 6.36 8.05 8.82 8.70 8.85 9.07 9.33 9.55 2.4% Average Revenue/Tonne (US$) 1,061 758 895 1,021 966 915 925 925 905 -1.5% Total Revenues (US$ Bn) 8.96 4.96 7.38 9.14 8.48 8.17 8.46 8.71 8.72 0.9% Cash Costs per Tonne (US$) 746 595 664 765 726 672 673 667 656 -2.8% EBITDA per Tonne (US$) 274 107 178 189 159 160 170 177 169 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 25.0% 13.7% 19.5% 18.2% 16.3% 17.3% 18.3% 18.9% 18.6% NM Net Debt/EBITDA 0.94 0.27 (0.48) (0.27) 1.69 1.64 1.17 0.73 0.36 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 (20F-2011), 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.

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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 Slabs 5,000 5,000 5,000 5,000 5,200 5,450 5,700 5,700 5,700 3.1% 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% Argentina (Flat Steel) 2,850 2,850 2,850 2,850 2,850 2,950 2,950 2,950 2,950 1.2% 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 9,650 9,650 9,650 9,650 9,950 10,050 10,050 10,050 10,050 0.3% Hot rolled Coils 8,550 8,550 8,550 8,550 8,850 8,950 8,950 8,950 8,950 0.4% Cold rolled Coils 4,300 4,300 4,300 4,300 4,300 5,800 5,800 5,800 5,800 10.5% Coating 2,900 2,900 3,500 3,500 3,640 3,940 3,940 3,940 3,940 2.7% Rebars & Wire Rods 1,100 1,100 1,300 1,300 1,300 1,300 1,300 1,300 1,300 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.


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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*)

2012E 2013E 2014E Previous Current Change Previous Current Change Previous Current Change

Revenue 9,043 8,480 -6.2% 9,256 8,174 -11.7% 8,462 Op. Profit 1,195 1,016 -15.0% 1,164 999 -14.2% 1,104 EBITDA 1,592 1,385 -13.0% 1,589 1,413 -11.1% 1,544 EBITDA Margin 17.6% 16.3% -127 bps 17.2% 17.3% 12 bps 18.3% Net Income 656 64 -90.3% 603 510 -15.4% 571 EPADS 3.30 0.30 -90.3% 3.00 2.50 -15.4% 2.90 *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.



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 = 21-24%) 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.


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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

Figure 9. Ternium Valuation vs. LatAm PeersPE

Source: Santander estimates based on Bloomberg consensus.

Figure 10. Industry Comps

Ticker Company Stock Price Mkt Cap EV/EBITDA P/E

STEEL BRAZIL 2012E 2013E 2014E 2012E 2013E 2014ECSNA3 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

BRAZIL AVERAGE 10.4 7.6 7.1 16.4 21.7 14.6

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

AMERICAS AVERAGE 6.6 5.4 4.7 22.6 9.6 8.2 NM: Not meaningful. Priced as of 9/7/12; all prices and estimates in US$. Sources: Santander estimates and Bloomberg consensus.

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S-07

M-0

8

S-08

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9

S-09

M-1

0

S-10

M-1

1

S-11

M-1

2

TX US Market Cap Weighted Average

0%

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30%

40%

50%

60%

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6

J-07

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8

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9

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1

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1

J-12

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Discount FV/EBITDA

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2.0

4.0

6.0

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18.0

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TX US Market Cap Weighted Average

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6

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6

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7

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8

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9

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Discount PE



RISKS 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.


11

FINANCIAL STATEMENTS Figure 11. TerniumIncome Statement, Balance Sheet, and Cash Flow Statement, 20092015E (U.S. Dollars in Millions) Income Statement 2009 2010 2011A 2012E 2013E 2014E 2015E Net sales 4,959 7,381 9,157 8,480 8,174 8,462 8,660 Cost of sales (4,110) (5,665) (7,094) (6,662) (6,374) (6,549) (6,674) Gross profit 849 1,716 2,063 1,817 1,800 1,913 1,985 SG&A expenses (532) (665) (786) (807) (801) (804) (823) Other operating income, net (21) 3 (12) 6 0 0 0 Operating income 296 1,053 1,265 1,016 999 1,109 1,163 EBITDA 681 1,437 1,671 1,385 1,413 1,549 1,595 Financial results 92 46 (312) (101) (105) (102) (69) Goodwill 469 61 11 (505) 0 0 0 Equity income 1 26 1 (5) 0 0 0 Pretax profits 858 1,186 966 405 894 1,007 1,094 Income tax (91) (407) (315) (301) (295) (332) (361) Effective Tax Rate 0 0 0 1 0 0 0 Minority interest (50) (157) (136) (40) (89) (101) (109) Net income 717 622 514 64 510 574 623 Balance Sheet 2009 2010 2011 2012E 2013E 2014E 2015E Cash & cash equivalents 2,143 2,628 2,441 205 324 740 1,109 Trade receivables 438 664 735 777 761 788 807 Inventories 1,351 1,953 2,137 2,074 2,096 2,189 2,267 Other 1,102 278 241 454 459 463 468 Current Assets 5,033 5,523 5,554 3,511 3,639 4,180 4,651 Fixed assets 4,040 4,263 4,033 4,526 4,812 4,721 4,639 Non-Consolidated Companies 0 0 0 2,065 1,560 1,560 1,560 Other 1,219 1,327 1,149 1,073 1,008 947 890 Non Current Assets 5,259 5,589 5,182 7,664 7,379 7,228 7,089 Total Assets 10,293 11,112 10,736 11,175 11,018 11,408 11,740 Short-Term Debt 540 513 1,042 1,071 1,071 1,071 971 Trade payables 413 588 678 614 524 538 549 Other liabilities 206 454 251 222 212 219 220 Current Liabilities 1,159 1,556 1,971 1,907 1,807 1,828 1,739 Long-Term debt 1,787 1,427 949 1,474 1,574 1,474 1,374 Deferred income tax 857 878 749 723 736 730 733 Other liabilities 228 236 237 250 238 240 241 Non-Current Liabilities 2,873 2,541 1,935 2,447 2,548 2,444 2,348 Total Liabilities 4,032 4,096 3,906 4,354 4,355 4,272 4,088 Minority interest 965 1,135 1,085 1,096 1,096 1,096 1,096 Equity 5,296 5,881 5,745 5,724 5,567 6,040 6,556 Cash Flow Statements 2009 2010 2011 2012E 2013E 2014E 2015E Net income 717 622 514 64 510 574 623 Depreciation and amortization 385 383 406 369 414 440 432 Working Capital 635 (448) (400) (184) (165) (116) (94) Other (576) 284 130 482 109 121 129 Operating Cash Flow 1,162 840 647 741 868 1,019 1,091 Capex and acquisitions (209) (417) (602) (3,230) (700) (350) (350) Divestments and Others 1,000 (53) 722 117 0 0 0 Investing Cash Flow 791 (470) 121 (3,113) (700) (350) (350) Change in debt (923) (520) 35 556 100 (100) (200) Dividends 0 (100) (147) (147) (150) (153) (172) Others 0 (33) (252) 14 0 0 0 Financing Cash Flow (923) (654) (365) 422 (50) (253) (372) Net Change in Cash 1,030 (284) 404 (1,950) 118 416 369 Cash at Beginning 1,156 2,143 2,628 2,441 205 324 740 FX effect on cash/others 43 (769) 590 286 0 0 0 Cash at End 2,143 2,628 2,441 205 324 740 1,109 Sources: Company reports and Santander estimates.



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

Sources: Bloomberg and Santander.

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

Source: Santander.

Ternium

MSCI

0

20

40

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Ternium ( L Axis) MXLA

B $32.1012/12/11

B $40.0012/8/09

B $25.007/6/09

B $50.006/14/10

B $47.0012/13/10

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

2012

IMPORTANT DISCLOSURES

Key to Investment Codes Rating

Definition

% of Companies

Covered with This Rating

% of Companies Provided Investment Banking

Services in the Past 12 Months

Buy Expected to outperform the local market benchmark by more than 10%. 54.46% 19.67%Hold Expected to perform within a range of 0% to 10% above the local market

benchmark. 32.14% 12.50%Underperform/Sell Expected to underperform the local market benchmark. 12.95% 6.90%Under review 0.45% --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 Securities Inc., 45 East 53rd Street, 17th 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.

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